Item 1. Financial Statements
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
79.2
|
|
|
$
|
186.8
|
|
Trade receivables, less allowance for doubtful accounts of $10.8 and $11.1 as of September 30, 2017 and December 31, 2016, respectively
|
459.4
|
|
|
423.9
|
|
Inventories
|
555.4
|
|
|
424.6
|
|
Prepaid expenses and other
|
105.9
|
|
|
88.8
|
|
Total current assets
|
1,199.9
|
|
|
1,124.1
|
|
Property, plant and equipment, net of accumulated depreciation of $373.2 and $304.7 as of September 30, 2017 and December 31, 2016, respectively
|
349.1
|
|
|
320.5
|
|
Deferred income taxes
|
205.8
|
|
|
149.7
|
|
Goodwill
|
703.1
|
|
|
689.5
|
|
Intangible assets, net of accumulated amortization of $119.9 and $84.8 as of September 30, 2017 and December 31, 2016, respectively
|
600.9
|
|
|
636.6
|
|
Other assets
|
109.0
|
|
|
103.1
|
|
Total assets
|
$
|
3,167.8
|
|
|
$
|
3,023.5
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
Current liabilities:
|
|
|
|
Short-term borrowings
|
$
|
11.8
|
|
|
$
|
10.8
|
|
Current portion of long-term debt
|
256.8
|
|
|
18.1
|
|
Accounts payable
|
344.4
|
|
|
296.9
|
|
Accrued expenses and other
|
345.4
|
|
|
382.9
|
|
Total current liabilities
|
958.4
|
|
|
708.7
|
|
Long-term debt
|
2,656.0
|
|
|
2,663.1
|
|
Long-term pension and other post-retirement plan liabilities
|
179.8
|
|
|
184.1
|
|
Other long-term liabilities
|
75.5
|
|
|
82.4
|
|
Stockholders’ deficiency:
|
|
|
|
Class A Common Stock, par value $0.01 per share; 900,000,000 shares authorized; 54,623,128 and 53,956,073 shares issued as of September 30, 2017 and December 31, 2016, respectively
|
0.5
|
|
|
0.5
|
|
Additional paid-in capital
|
1,039.1
|
|
|
1,033.2
|
|
Treasury stock, at cost: 1,114,528 and 1,024,908 shares of Class A Common Stock as of September 30, 2017 and December 31, 2016, respectively
|
(21.7
|
)
|
|
(19.2
|
)
|
Accumulated deficit
|
(1,483.9
|
)
|
|
(1,377.6
|
)
|
Accumulated other comprehensive loss
|
(235.9
|
)
|
|
(251.7
|
)
|
Total stockholders’ deficiency
|
(701.9
|
)
|
|
(614.8
|
)
|
Total liabilities and stockholders’ deficiency
|
$
|
3,167.8
|
|
|
$
|
3,023.5
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements
REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(dollars in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
666.5
|
|
|
$
|
604.8
|
|
|
$
|
1,907.1
|
|
|
$
|
1,533.3
|
|
Cost of sales
|
290.3
|
|
|
243.4
|
|
|
823.6
|
|
|
568.8
|
|
Gross profit
|
376.2
|
|
|
361.4
|
|
|
1,083.5
|
|
|
964.5
|
|
Selling, general and administrative expenses
|
362.6
|
|
|
285.7
|
|
|
1,075.3
|
|
|
792.8
|
|
Acquisition and integration costs
|
12.7
|
|
|
33.5
|
|
|
40.2
|
|
|
39.5
|
|
Restructuring charges and other, net
|
6.4
|
|
|
0.5
|
|
|
11.3
|
|
|
2.3
|
|
Operating (loss) income
|
(5.5
|
)
|
|
41.7
|
|
|
(43.3
|
)
|
|
129.9
|
|
Other expenses:
|
|
|
|
|
|
|
|
Interest expense
|
38.6
|
|
|
27.4
|
|
|
110.3
|
|
|
69.3
|
|
Amortization of debt issuance costs
|
2.3
|
|
|
1.7
|
|
|
6.8
|
|
|
4.6
|
|
Loss on early extinguishment of debt
|
—
|
|
|
16.9
|
|
|
—
|
|
|
16.9
|
|
Foreign currency (gains) losses, net
|
(3.1
|
)
|
|
1.2
|
|
|
(16.8
|
)
|
|
6.3
|
|
Miscellaneous, net
|
0.3
|
|
|
(0.6
|
)
|
|
1.8
|
|
|
(0.1
|
)
|
Other expenses
|
38.1
|
|
|
46.6
|
|
|
102.1
|
|
|
97.0
|
|
(Loss) income from continuing operations before income taxes
|
(43.6
|
)
|
|
(4.9
|
)
|
|
(145.4
|
)
|
|
32.9
|
|
(Benefit from) provision for income taxes
|
(10.8
|
)
|
|
(0.4
|
)
|
|
(37.8
|
)
|
|
16.0
|
|
(Loss) income from continuing operations, net of taxes
|
(32.8
|
)
|
|
(4.5
|
)
|
|
(107.6
|
)
|
|
16.9
|
|
Income (loss) from discontinued operations, net of taxes
|
0.4
|
|
|
(0.2
|
)
|
|
1.3
|
|
|
(2.3
|
)
|
Net (loss) income
|
$
|
(32.4
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(106.3
|
)
|
|
$
|
14.6
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
(a)
|
(1.2
|
)
|
|
2.7
|
|
|
5.3
|
|
|
8.0
|
|
Amortization of pension related costs, net of tax
(b)(c)
|
2.0
|
|
|
1.8
|
|
|
6.1
|
|
|
5.6
|
|
Pension curtailment gain, net of tax
(d)
|
—
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
Reclassification into earnings of accumulated losses from the de-designated 2013 Interest Rate Swap, net of tax
(e)
|
0.6
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
Revaluation of derivative financial instruments, net of reclassifications into earnings, net of tax
(f)
|
—
|
|
|
0.8
|
|
|
—
|
|
|
0.1
|
|
Other comprehensive income, net
|
1.4
|
|
|
5.3
|
|
|
15.8
|
|
|
13.7
|
|
Total comprehensive (loss) income
|
$
|
(31.0
|
)
|
|
$
|
0.6
|
|
|
$
|
(90.5
|
)
|
|
$
|
28.3
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.62
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
0.32
|
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
0.02
|
|
|
(0.04
|
)
|
Net (loss) income
|
$
|
(0.61
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.62
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
0.32
|
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
0.02
|
|
|
(0.04
|
)
|
Net (loss) income
|
$
|
(0.61
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
52,615,412
|
|
|
52,498,246
|
|
|
52,584,954
|
|
|
52,498,840
|
|
Diluted
|
52,615,412
|
|
|
52,498,246
|
|
|
52,584,954
|
|
|
52,617,740
|
|
|
|
(a)
|
Net of tax benefit of
$0.2 million
and tax expense
$0.7 million
for the
three months ended September 30, 2017
and
2016
, respectively, and tax expense of
$1.5 million
and
$1.3 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
|
|
|
(b)
|
Net of tax expense of
$0.4 million
for each of the
three months ended September 30, 2017
and
2016
, and
$1.3 million
and
$1.1 million
for
nine months ended September 30, 2017
and
2016
, respectively.
|
|
|
(c)
|
This amount is included in the computation of net periodic benefit (income) costs. See Note
11
, “Pension and Post-Retirement Benefits,” for additional information regarding net periodic benefit (income) costs.
|
|
|
(d)
|
Net of tax expense of
$0.3 million
for the
nine months ended September 30, 2017
.
|
|
|
(e)
|
Net of tax benefit of
$0.4 million
and
$1.1 million
for the three and
nine months ended September 30, 2017
, respectively.
|
|
|
(f)
|
Net of tax expense of
$0.5 million
and
$0.1 million
for the three and nine months ended September 30,
2016
, respectively.
|
See Accompanying Notes to Unaudited Consolidated Financial Statements
REVLON, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
(dollars in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In-Capital
|
|
Treasury Stock
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total Stockholders’ Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
$
|
0.5
|
|
|
$
|
1,033.2
|
|
|
$
|
(19.2
|
)
|
|
$
|
(1,377.6
|
)
|
|
$
|
(251.7
|
)
|
|
$
|
(614.8
|
)
|
Treasury stock acquired, at cost
(a)
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
Stock-based compensation amortization
|
—
|
|
|
5.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.9
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(106.3
|
)
|
|
—
|
|
|
(106.3
|
)
|
Other comprehensive income, net
(b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
|
15.8
|
|
Balance, September 30, 2017
|
$
|
0.5
|
|
|
$
|
1,039.1
|
|
|
$
|
(21.7
|
)
|
|
$
|
(1,483.9
|
)
|
|
$
|
(235.9
|
)
|
|
$
|
(701.9
|
)
|
|
|
(a)
|
Pursuant to the share withholding provisions of the Fourth Amended and Restated Revlon, Inc. Stock Plan (the “Stock Plan”), the Company withheld an aggregate of
89,620
shares of Revlon Class A Common Stock during the
nine months ended September 30, 2017
, to satisfy certain minimum statutory tax withholding requirements related to the vesting of restricted shares for certain senior executives. These withheld shares were recorded as treasury stock using the cost method, at a weighted average price per share of
$27.67
during the
nine months ended September 30, 2017
, based on the closing price of Revlon Class A Common Stock as reported on the New York Stock Exchange (the "NYSE") consolidated tape on each respective vesting date, for a total of
$2.5 million
. See Note 15, "Stock Compensation Plan" to the Consolidated Financial Statements in Revlon's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 3, 2017 (the "2016 Form 10-K") for details regarding restricted stock awards under the Stock Plan.
|
|
|
(b)
|
See Note 13, “Accumulated Other Comprehensive Loss,” regarding the changes in the accumulated balances for each component of other comprehensive loss during the
nine months ended September 30, 2017
.
|
See Accompanying Notes to Unaudited Consolidated Financial Statements
REVLON, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net (loss) income
|
$
|
(106.3
|
)
|
|
$
|
14.6
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
Depreciation and amortization
|
111.7
|
|
|
81.0
|
|
Foreign currency (gains) losses from re-measurement
|
(20.8
|
)
|
|
5.5
|
|
Amortization of debt discount
|
0.9
|
|
|
1.1
|
|
Stock-based compensation amortization
|
5.9
|
|
|
4.8
|
|
(Benefit from) provision for deferred income taxes
|
(53.2
|
)
|
|
6.9
|
|
Loss on early extinguishment of debt
|
—
|
|
|
16.9
|
|
Amortization of debt issuance costs
|
6.8
|
|
|
4.6
|
|
Loss on sale of certain assets
|
1.5
|
|
|
0.2
|
|
Pension and other post-retirement cost (income)
|
1.9
|
|
|
(0.5
|
)
|
Change in assets and liabilities, net of acquisitions:
|
|
|
|
|
Increase in trade receivables
|
(25.1
|
)
|
|
(112.0
|
)
|
(Increase) decrease in inventories
|
(121.6
|
)
|
|
5.0
|
|
Increase in prepaid expenses and other current assets
|
(13.1
|
)
|
|
(20.0
|
)
|
Increase (decrease) in accounts payable
|
36.4
|
|
|
(3.5
|
)
|
Decrease in accrued expenses and other current liabilities
|
(51.8
|
)
|
|
(36.9
|
)
|
Pension and other post-retirement plan contributions
|
(5.8
|
)
|
|
(6.0
|
)
|
Purchases of permanent displays
|
(37.3
|
)
|
|
(25.9
|
)
|
Other, net
|
(4.3
|
)
|
|
(4.0
|
)
|
Net cash used in operating activities
|
(274.2
|
)
|
|
(68.2
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Capital expenditures
|
(69.5
|
)
|
|
(33.1
|
)
|
Business acquisition, net of acquired cash
|
—
|
|
|
(1,028.7
|
)
|
Proceeds from the sale of certain assets
|
—
|
|
|
0.5
|
|
Net cash used in investing activities
|
(69.5
|
)
|
|
(1,061.3
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Net increase (decrease) in short-term borrowings and overdraft
|
1.2
|
|
|
(2.6
|
)
|
Net borrowings under the 2016 Revolving Credit Facility
|
243.9
|
|
|
65.4
|
|
Repayments under the 2016 Term Loan Facility
|
(13.5
|
)
|
|
—
|
|
Repayments under the Old Acquisition Term Loan
|
—
|
|
|
(15.1
|
)
|
Prepayments under the 2011 Term Loan
|
—
|
|
|
(11.5
|
)
|
Repayment of Old Acquisition Term Loan
|
—
|
|
|
(658.6
|
)
|
Repayment of 2011 Term Loan
|
—
|
|
|
(651.4
|
)
|
Borrowings under the 2016 Term Loan Facility
|
—
|
|
|
1,791.0
|
|
Proceeds from the issuance of 6.25% Senior Notes
|
—
|
|
|
450.0
|
|
Payment of financing costs
|
(1.1
|
)
|
|
(61.5
|
)
|
Tax withholdings related to net share settlements of restricted stock units and awards
|
(2.5
|
)
|
|
(2.6
|
)
|
Treasury stock purchased
|
—
|
|
|
(2.7
|
)
|
Other financing activities
|
(1.3
|
)
|
|
(2.2
|
)
|
Net cash provided by financing activities
|
226.7
|
|
|
898.2
|
|
Effect of exchange rate changes on cash and cash equivalents
|
9.4
|
|
|
3.6
|
|
Net decrease in cash and cash equivalents
|
(107.6
|
)
|
|
(227.7
|
)
|
Cash and cash equivalents at beginning of period
|
186.8
|
|
|
326.9
|
|
Cash and cash equivalents at end of period
|
$
|
79.2
|
|
|
$
|
99.2
|
|
Supplemental schedule of cash flow information:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
124.5
|
|
|
$
|
68.4
|
|
Income taxes, net of refunds
|
11.1
|
|
|
19.4
|
|
See Accompanying Notes to Unaudited Consolidated Financial Statements
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Item 1. Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revlon, Inc. ("Revlon" and together with its subsidiaries, the "Company") conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation ("Products Corporation"), and its subsidiaries. Revlon is an indirect majority-owned subsidiary of MacAndrews & Forbes Incorporated (together with certain of its affiliates other than the Company, "MacAndrews & Forbes"), a corporation wholly-owned by Ronald O. Perelman. The Company is a leading global beauty company with an iconic portfolio of brands. The Company develops, manufactures, markets, distributes and sells an extensive array of color cosmetics, hair color, hair care and hair treatments, fragrances, skin care, beauty tools, men’s grooming products, anti-perspirant deodorants and other beauty care products across a variety of distribution channels. The Company is building a combined organization that is entrepreneurial, agile and boldly creative, with a passion for beauty. The Company has strategic brand builders developing a diverse portfolio of iconic brands that delight consumers around the world wherever and however they shop for beauty. The Company strives to be an ethical company that values inclusive leadership and is committed to sustainable and responsible growth. The Company operates in
four
reporting segments: the consumer division (“Consumer”); Elizabeth Arden; the professional division (“Professional”); and Other. The Company’s principal customers for its products in the Consumer segment include large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, the Internet/e-commerce, television shopping, department stores, one-stop shopping beauty retailers, specialty cosmetics stores and perfumeries in the U.S. and internationally. The Company's principal customers for its products in the Elizabeth Arden segment include prestige retailers, the mass retail channel, perfumeries, boutiques, department and specialty stores, travel retailers and distributors, as well as direct sales to consumers via Elizabeth Arden branded retail stores and e-commerce business. Elizabeth Arden products are also sold through the Elizabeth Arden Red Door Spa beauty salons and spas. The Company's principal customers for its products in the Professional segment include hair and nail salons and distributors to professional salons in the U.S. and internationally. The Other segment primarily includes the operating results related to the development, marketing and distribution of certain licensed fragrances and other beauty products.
The accompanying Consolidated Financial Statements are unaudited. In management's opinion, all adjustments necessary for a fair presentation have been made. The Consolidated Financial Statements include the Company's accounts after the elimination of all material intercompany balances and transactions.
The preparation of the Company's Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary. Significant estimates made in the accompanying Consolidated Financial Statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, trade support costs, certain assumptions related to the valuation of acquired intangible and long-lived assets and the recoverability of goodwill, intangible and long-lived assets, income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, restructuring costs, certain estimates and assumptions used in the calculation of the net periodic benefit (income) costs and the projected benefit obligations for the Company’s pension and other post-retirement plans, including the expected long-term return on pension plan assets and the discount rate used to value the Company’s pension benefit obligations. The Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in Revlon's 2016 Form 10-K.
The Company's results of operations and financial position for interim periods are not necessarily indicative of those to be expected for the full year.
Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current period's presentation.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies certain aspects of accounting for share-based payment transactions, including transactions in which an employee uses shares to satisfy the employer’s minimum statutory income tax withholding obligation, forfeitures and income taxes when awards vest or are settled. The Company adopted ASU No. 2016-09 beginning on January 1, 2017 and the adoption of this new guidance did not have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures. The adoption of ASU No. 2016-09 resulted in tax withholdings related to net
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
share settlements of restricted stock units and awards in the amount of
$2.6 million
, previously reported in the Unaudited Consolidated Statement of Cash Flows for the first nine months of 2016 as a component of cash flows from operating activities, to be reclassified as a component of cash flows from financing activities.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventories by requiring inventory to be measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted ASU No. 2015-11 beginning on January 1, 2017 and the adoption of this new guidance did not have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures.
Recently Issued Accounting Pronouncements
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the way that employers present net periodic pension cost ("NPPC") and net periodic postretirement benefit cost ("NPPBC") within the income statement. The amendment requires an employer to present the service cost component of NPPC and NPPBC in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The other components of NPPC and NPPBC would be presented separately from this line item and below any subtotal of operating income; companies will need to disclose the line items used to present these other components of NPPC and NPPBC, if not separately presented in the statement of operations. In addition, only the service cost component would be eligible for capitalization in assets. This guidance is effective retrospectively for annual and quarterly periods beginning after December 15, 2017, with early adoption permitted. The Company expects to adopt ASU No. 2017-07 beginning as of January 1, 2018, and does not expect this new guidance will have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The underlying principle of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Entities may adopt ASU No. 2014-09 either retrospectively for all periods presented in the financial statements (i.e., the full retrospective method) or as a cumulative-effect adjustment as of the date of adoption (i.e., the modified retrospective method), without applying it to comparative years’ financial statements.
In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which allows for a deferral of the adoption date for ASU No. 2014-09 until January 1, 2018, while permitting early adoption no earlier than January 1, 2017.
The Company plans to adopt ASU No. 2014-09 on January 1, 2018 and anticipates adopting this standard using the modified retrospective method. The Company is currently in the process of evaluating its revenue streams under the requirements of ASU No. 2014-09 and based on the progress of this examination to date, the Company anticipates that its adoption of ASU No. 2014-09 will not result in any material adjustment to its results of operations and financial condition. The Company is also analyzing ASU No. 2014-09's expanded disclosure requirements, and whether the adoption of ASU No. 2014-09 will require any changes to its accounting policies, processes, systems and/or internal controls.
2. BUSINESS COMBINATIONS
The Elizabeth Arden Acquisition
On September 7, 2016 (the "Elizabeth Arden Acquisition Date"), the Company completed the acquisition of Elizabeth Arden, Inc. ("Elizabeth Arden" and the "Elizabeth Arden Acquisition") for a total cash purchase price of
$1,034.3 million
pursuant to an agreement and plan of merger (the "Merger Agreement") by and among Revlon, Products Corporation, RR Transaction Corp. ("Acquisition Sub," then a wholly-owned subsidiary of Products Corporation), and Elizabeth Arden. On the Elizabeth Arden Acquisition Date, Elizabeth Arden merged (the “Merger”) with and into Acquisition Sub, with Elizabeth Arden surviving the Merger as a wholly-owned subsidiary of Products Corporation. Elizabeth Arden is a global prestige beauty products company with an iconic portfolio of brands that are highly complementary to the Company's existing brand portfolio and are sold worldwide. In North America, Elizabeth Arden’s principal customers include prestige retailers, specialty stores, the mass retail channel, distributors, department stores and other retailers, as well as direct sales to consumers via its Elizabeth Arden Red Door branded
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
retail stores and ElizabethArden.com e-commerce business. Elizabeth Arden products are also sold through the Elizabeth Arden Red Door Spa beauty salons and spas. Internationally, Elizabeth Arden’s portfolio of owned and licensed brands is sold to perfumeries, boutiques, department stores, travel retailers and distributors.
Products Corporation financed the Elizabeth Arden Acquisition with the proceeds from (i) a
7
-year
$1,800.0 million
senior secured term loan facility (the “2016 Term Loan Facility” and such agreement being the “2016 Term Loan Agreement”); (ii)
$35.0 million
of borrowings under a
5
-year
$400.0 million
senior secured asset-based revolving credit facility (the “2016 Revolving Credit Facility” and such agreement being the “2016 Revolving Credit Agreement” and such facility, together with the 2016 Term Loan Facility, being the “2016 Senior Credit Facilities” and such agreements being the "2016 Credit Agreements"); (iii)
$450.0 million
aggregate principal amount of Products Corporation’s
6.25%
Senior Notes due 2024 (the “
6.25%
Senior Notes”); and (iv) approximately
$126.7 million
of cash on hand.
Elizabeth Arden's results of operations are included in the Company’s Consolidated Financial Statements commencing on the Elizabeth Arden Acquisition Date.
For the
nine months ended
September 30, 2017
, the Company incurred
$38.1 million
of acquisition and integration costs in its Consolidated Statement of Operations and Comprehensive (Loss) Income related to the Elizabeth Arden Acquisition, which consist of
$0.8 million
of acquisition costs and
$37.3 million
of integration costs. The acquisition costs primarily include legal and consulting fees to complete the Elizabeth Arden Acquisition. The integration costs consist of non-restructuring costs related to integrating Elizabeth Arden's operations into the Company's business.
Purchase Price Allocation
The Company accounted for the Elizabeth Arden Acquisition as a business combination during the third quarter of 2016. The Company finalized the allocation of the Elizabeth Arden purchase price to the Elizabeth Arden assets acquired and liabilities assumed in the third quarter of 2017, which resulted in several adjustments to their estimated fair value as previously reported (the "Measurement Period Adjustments"). The table below summarizes the allocation of the total consideration of
$1,034.3 million
paid on the Elizabeth Arden Acquisition Date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value as Previously Reported
(a)
|
|
Measurement Period Adjustments
|
|
Fair Value as Adjusted
|
Cash
|
$
|
41.1
|
|
|
$
|
—
|
|
|
$
|
41.1
|
|
Accounts Receivable
|
132.6
|
|
|
—
|
|
|
132.6
|
|
Inventories
|
323.3
|
|
|
—
|
|
|
323.3
|
|
Prepaid expenses and other current assets
|
30.7
|
|
|
—
|
|
|
30.7
|
|
Property and equipment
|
91.2
|
|
|
—
|
|
|
91.2
|
|
Deferred taxes, net
(b)
|
68.7
|
|
|
10.0
|
|
|
78.7
|
|
Intangible assets
(c)
|
336.8
|
|
|
(15.4
|
)
|
|
321.4
|
|
Goodwill
|
221.7
|
|
|
12.3
|
|
|
234.0
|
|
Other assets
|
16.6
|
|
|
—
|
|
|
16.6
|
|
Total assets acquired
|
$
|
1,262.7
|
|
|
$
|
6.9
|
|
|
$
|
1,269.6
|
|
Accounts payable
|
(116.0
|
)
|
|
—
|
|
|
(116.0
|
)
|
Accrued expenses
(d)
|
(109.3
|
)
|
|
1.7
|
|
|
(107.6
|
)
|
Other long-term liabilities
(e)
|
(3.1
|
)
|
|
(8.6
|
)
|
|
(11.7
|
)
|
Total liabilities assumed
|
$
|
(228.4
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
(235.3
|
)
|
Total consideration transferred
|
$
|
1,034.3
|
|
|
$
|
—
|
|
|
$
|
1,034.3
|
|
(a)
As previously reported in Revlon's 2016 Form 10-K.
(b)
The Measurement Period Adjustments to deferred taxes, net related to net increases in deferred tax assets as a result of the changes to the estimated fair values and remaining useful lives of acquired trade name intangible assets and the recognition of non-qualified benefit plan obligations of Elizabeth Arden, as discussed further below.
(c)
The Measurement Period Adjustments to intangible assets related to a revised approach in the determination of the fair values for the acquired Elizabeth Arden trade names. During the first quarter of 2017, the Company obtained further clarity into the product portfolio acquired through
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
the Elizabeth Arden Acquisition, and, recognizing that each brand has its own distinct profile with its own defining attributes, as well as differing expected useful lives, determined that a revised valuation approach was needed. The Company valued the acquired trade names within the Elizabeth Arden product portfolio, including Visible Difference, Elizabeth Arden Ceramide, Prevage, Eight Hour Cream, Elizabeth Arden Red Door, Elizabeth Arden Green Tea and Elizabeth Arden 5th Avenue. The Company determined the fair values of each acquired trade name using a risk-adjusted discounted cash flow approach, specifically the relief-from-royalty method. The relief-from-royalty method requires identifying the hypothetical cash flows generated by an assumed royalty rate that a third party would pay to license the trade names, and discounting them back to the Elizabeth Arden Acquisition Date. The royalty rate used in the valuation of each acquired trade name was based on a consideration of market rates for similar categories of assets.
The difference between the preliminary valuation of the Elizabeth Arden trade name and the sum of the fair values of the individual trade names within the Elizabeth Arden product portfolio resulted in an increase to goodwill of
$15.4 million
, which was recorded in the fiscal quarter ended March 31, 2017. As a result of this revised approach, the Company recognized amortization expense of approximately
$1.8 million
in its Unaudited Consolidated Statement of Operations and Comprehensive (Loss) Income during the first nine months of 2017 related to the amortization of the acquired trade names from the date of acquisition through December 31, 2016.
(d)
The Measurement Period Adjustments to accrued expenses during the nine months ended
September 30, 2017
related to changes in estimated payments for acquisition-related costs.
(e)
The Measurement Period Adjustments to other long-term liabilities during the nine months ended
September 30, 2017
related to the recognition of the projected benefit obligation of a certain foreign non-qualified benefit plan of Elizabeth Arden.
In determining the fair values of net assets acquired in the Elizabeth Arden Acquisition and resulting goodwill, the Company considered, among other factors, the analyses of Elizabeth Arden's historical financial performance and an estimate of the future performance of the acquired business, as well as the intended use of the acquired assets.
The intangible assets acquired in the Elizabeth Arden Acquisition based on the estimate of the fair values of the identifiable intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
(a)
|
|
|
|
Adjusted
|
|
Estimated Fair Values
|
|
Remaining Useful Life at the Elizabeth Arden Acquisition Date (in years)
|
|
Measurement Period Adjustments
(b)
|
|
Fair Values
|
|
Remaining Useful Life at the Elizabeth Arden Acquisition Date
(in years)
|
Trademarks, indefinite-lived
|
$
|
142.0
|
|
|
Indefinite
|
|
$
|
(103.0
|
)
|
|
$
|
39.0
|
|
|
Indefinite
|
Trademarks, finite-lived
|
15.0
|
|
|
15
|
|
87.6
|
|
|
102.6
|
|
|
5 - 20
|
Technology
|
2.5
|
|
|
10
|
|
—
|
|
|
2.5
|
|
|
10
|
Customer relationships
|
123.0
|
|
|
16
|
|
—
|
|
|
123.0
|
|
|
16
|
License agreements
|
22.0
|
|
|
19
|
|
—
|
|
|
22.0
|
|
|
19
|
Distribution rights
|
31.0
|
|
|
18
|
|
—
|
|
|
31.0
|
|
|
18
|
Favorable lease commitments
|
1.3
|
|
|
3
|
|
—
|
|
|
1.3
|
|
|
3
|
Total acquired intangible assets
|
$
|
336.8
|
|
|
|
|
$
|
(15.4
|
)
|
(b)
|
$
|
321.4
|
|
|
|
(a)
As previously reported in Revlon's 2016 Form 10-K.
(b)
The Measurement Period Adjustments to the Elizabeth Arden acquired trade names resulted in a
$15.4 million
increase to goodwill, which was recorded in the fiscal quarter ended March 31, 2017.
In the fiscal quarter ended March 31, 2017, the Company recorded a
$54.8 million
deferred tax liability related to the
$321.4 million
of acquired intangible assets outlined in the above table. This deferred tax liability represents the tax effect of the difference between the
$321.4 million
assigned fair value of the intangible assets and the
$148.6 million
tax basis of such assets.
The goodwill and intangible assets acquired in the Elizabeth Arden Acquisition are not
expected to be deductible for income tax purposes.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Unaudited Pro Forma Results
The following table presents the Company's pro forma consolidated net sales and income from continuing operations before income taxes for the three and
nine months ended September 30, 2016
, respectively. The unaudited pro forma results include the historical consolidated statements of operations of the Company and Elizabeth Arden, giving effect to the Elizabeth Arden Acquisition and related financing transactions as if they had occurred at the beginning of the earliest period presented.
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Results
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2016
|
Net sales
|
$
|
745.1
|
|
|
$
|
2,058.2
|
|
Income (loss) from continuing operations, before income taxes
|
(1.9
|
)
|
|
(28.8
|
)
|
The pro forma results, prepared in accordance with U.S. GAAP, include the following pro forma adjustments related to the Elizabeth Arden Acquisition:
(i) as a result of a
$38.0 million
increase in the fair value of acquired inventory at the Acquisition Date, the Company recognized a
$4.2 million
increase in its cost of sales during the three and nine months ended September 30, 2016 in its consolidated financial statements. The pro forma adjustments include an adjustment to reverse the
$4.2 million
recognized in the third quarter of 2016 within cost of sales because it will not have a recurring impact;
(ii) the elimination of
$58.1 million
and
$64.7 million
of acquisition and integration costs recognized by the Company and Elizabeth Arden during the three and nine months ended September 30, 2016, respectively;
(iii)
nil
and
$1.4 million
pro forma decrease in depreciation as a result of the fair value adjustments to property and equipment for the three and
nine months ended
September 30, 2016
, respectively;
(iv) a
$1.7 million
and
$4.6 million
pro forma increase in amortization expense of acquired finite-lived intangible assets recorded in connection with the Elizabeth Arden Acquisition for the three and
nine months ended
September 30, 2016
, respectively; and
(v) a pro forma increase in interest expense and amortization of debt issuance costs related to financing the Elizabeth Arden Acquisition and related debt restructuring transactions as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
($ in millions)
|
September 30, 2016
|
|
September 30, 2016
|
Interest Expense
|
|
|
|
Pro forma interest on 2016 Senior Credit Facilities and 6.25% Senior Notes
|
$
|
29.1
|
|
|
$
|
86.7
|
|
Reversal of Elizabeth Arden’s historical interest expense
|
(5.6
|
)
|
|
(19.5
|
)
|
Company historical interest expense, as reflected in the historical consolidated financial statements
|
(20.3
|
)
|
|
(45.2
|
)
|
Total adjustment for pro forma interest expense
|
$
|
3.2
|
|
|
$
|
22.0
|
|
Debt issuance costs
|
|
|
|
Pro forma amortization of debt issuance costs
|
$
|
2.0
|
|
|
$
|
6.1
|
|
Company historical amortization of debt issuance costs, as reflected in the historical consolidated financial statements
|
(1.1
|
)
|
|
(3.3
|
)
|
Reversal of Elizabeth Arden’s historical amortization of debt issuance costs
|
(0.4
|
)
|
|
(1.3
|
)
|
Total adjustment for pro forma amortization of debt issuance costs
|
$
|
0.5
|
|
|
$
|
1.5
|
|
The unaudited pro forma results do not include: (1) any incremental revenue generation, synergies or cost reductions that may be achieved as a result of the Elizabeth Arden Acquisition; or (2) the impact of non-operating or non-recurring items directly related to the Elizabeth Arden Acquisition. In addition, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined company.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
3. RESTRUCTURING CHARGES
EA Integration Restructuring Program
In December 2016, in connection with integrating the Elizabeth Arden and Revlon organizations, the Company began the process of implementing certain integration activities, including consolidating offices, eliminating certain duplicative activities and streamlining back-office support (the “EA Integration Restructuring Program”). The EA Integration Restructuring Program is designed to reduce the Company’s selling, general and administrative expenses ("SG&A"). As a result of the EA Integration Restructuring Program, the Company expects to eliminate approximately
350
positions worldwide.
In connection with implementing the EA Integration Restructuring Program, the Company expects to recognize approximately
$65 million
to
$75 million
of total pre-tax restructuring charges (the “EA Integration Restructuring Charges”), consisting of: (i) approximately
$40 million
to
$50 million
of employee-related costs, including severance, retention and other contractual termination benefits; (ii) approximately
$15 million
of lease termination costs; and (iii) approximately
$10 million
of other related charges.
A summary of the restructuring and related charges incurred through
September 30, 2017
in connection with the EA Integration Restructuring Program is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges and Other, Net
|
|
|
|
|
|
|
|
Employee Severance and Other Personnel Benefits
|
|
Lease Termination and Other Costs
(a)
|
|
Total Restructuring Charges
|
|
Inventory Adjustments
(b)
|
|
Other Related Charges
(c)
|
|
Total Restructuring and Related Charges
|
Charges incurred through December 31, 2016
|
$
|
31.5
|
|
|
$
|
0.2
|
|
|
$
|
31.7
|
|
|
$
|
0.5
|
|
|
$
|
2.3
|
|
|
$
|
34.5
|
|
Charges incurred during the nine months ended September 30, 2017
|
10.1
|
|
|
4.0
|
|
|
14.1
|
|
|
0.5
|
|
|
1.0
|
|
|
15.6
|
|
Cumulative charges incurred through September 30, 2017
|
$
|
41.6
|
|
|
$
|
4.2
|
|
|
$
|
45.8
|
|
|
$
|
1.0
|
|
|
$
|
3.3
|
|
|
$
|
50.1
|
|
(a)
Includes primarily lease termination costs of approximately
$3.9 million
recorded in the third quarter of 2017 related to certain Elizabeth Arden office space.
(b)
Inventory adjustments are recorded within cost of sales in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income.
(c)
Other related charges are recorded within SG&A in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income.
A summary of the restructuring charges incurred through
September 30, 2017
in connection with the EA Integration Restructuring Program by reportable segment is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred during the nine months ended
|
|
Cumulative charges incurred through
|
|
|
September 30, 2017
|
|
September 30, 2017
|
Elizabeth Arden
|
|
$
|
7.3
|
|
|
$
|
13.8
|
|
Consumer
|
|
2.9
|
|
|
7.1
|
|
Professional
|
|
0.3
|
|
|
5.9
|
|
Unallocated Corporate Expenses
|
|
3.6
|
|
|
19.0
|
|
Total
|
|
$
|
14.1
|
|
|
$
|
45.8
|
|
The Company expects that cash payments will total
$65 million
to
$75 million
in connection with the EA Integration Restructuring Charges, of which
$30.5 million
was paid in the
nine months ended September 30, 2017
. The remaining balance is expected to be substantially paid by the end of 2020.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Restructuring Reserve
The liability balance and related activity for each of the Company's restructuring programs are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized, Net
|
|
|
Liability
Balance at January 1, 2017
|
|
Expense (Income), Net
|
|
Foreign Currency Translation
|
|
Cash
|
|
Non-cash
|
|
Liability Balance at September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
EA Integration Restructuring Program:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other personnel benefits
|
$
|
31.5
|
|
|
$
|
10.1
|
|
|
$
|
—
|
|
|
$
|
(27.5
|
)
|
|
$
|
—
|
|
|
$
|
14.1
|
|
Other
|
3.0
|
|
|
5.5
|
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
|
5.5
|
|
2015 Efficiency Program:
(b)
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other personnel benefits
|
4.5
|
|
|
(3.2
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
0.4
|
|
Other
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Other immaterial actions:
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other personnel benefits
|
2.6
|
|
|
0.7
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
2.5
|
|
Other
|
1.0
|
|
|
0.5
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
1.5
|
|
Total restructuring reserve
|
$
|
42.8
|
|
|
$
|
13.6
|
|
|
$
|
0.1
|
|
|
$
|
(32.3
|
)
|
|
$
|
—
|
|
|
$
|
24.2
|
|
(a)
Includes
$1.5 million
in charges related to inventory adjustments and other restructuring-related charges that were reflected within cost of sales and SG&A, respectively, in the Company’s September 30, 2017 Unaudited Consolidated Statement of Operations and Comprehensive (Loss) Income.
(b)
In September 2015, the Company initiated restructuring actions to drive certain organizational efficiencies across the Company's Consumer and Professional segments (the "2015 Efficiency Program"). These actions were planned to occur through 2017 and are expected to reduce general and administrative expenses within the Consumer and Professional segments. During the third quarter of 2017, the Company performed a review of the 2015 Efficiency Program and determined that employees in certain positions that were initially identified to be eliminated would continue to be employed by the Company in varying positions in connection with integrating the Elizabeth Arden and Revlon organizations. As a result, the Company reversed approximately
$3.2 million
in previously accrued restructuring charges recognized in connection with the 2015 Efficiency Program. Of the total expected cash payments related to the 2015 Efficiency Program,
$7.0 million
was paid through
September 30, 2017
, with a remaining balance of approximately
$0.6 million
expected to be paid by the end of 2017. A summary of the restructuring and related charges incurred through
September 30, 2017
in connection with the 2015 Efficiency Program by reportable segment is presented in the following table:
|
|
|
|
|
|
|
|
2015 Efficiency Program cumulative charges incurred through
|
|
|
September 30, 2017
|
Consumer
|
|
$
|
3.6
|
|
Professional
|
|
3.5
|
|
Unallocated Corporate Expenses
|
|
0.5
|
|
Total
|
|
$
|
7.6
|
|
(c)
Consists primarily of
$0.8 million
in charges related to the program that Elizabeth Arden commenced prior to the Elizabeth Arden Acquisition to further align their organizational structure and distribution arrangements for the purpose of improving its go-to-trade capabilities and execution and to streamline their organization (the "Elizabeth Arden 2016 Business Transformation Program").
At
September 30, 2017
and December 31,
2016
, all of the restructuring reserve balances were included within accrued expenses and other in the Company's Consolidated Balance Sheets.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
4. DISCONTINUED OPERATIONS
On December 30, 2013, the Company announced that it was implementing the December 2013 Program, which primarily included exiting its direct manufacturing, warehousing and sales business operations in mainland China within the Consumer segment.
The results of the China discontinued operations are included within Income (loss) from discontinued operations, net of taxes, and relate entirely to the Consumer segment. The summary comparative financial results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Income (loss) from discontinued operations, before taxes
|
0.7
|
|
|
(0.2
|
)
|
|
1.6
|
|
|
(2.3
|
)
|
Provision for income taxes
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Income (loss) from discontinued operations, net of taxes
|
0.4
|
|
|
(0.2
|
)
|
|
1.3
|
|
|
(2.3
|
)
|
Assets and liabilities of the China discontinued operations included in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Cash and cash equivalents
|
$
|
1.3
|
|
|
$
|
1.7
|
|
Trade receivables, net
|
0.2
|
|
|
0.2
|
|
Total current assets
|
1.5
|
|
|
1.9
|
|
Total assets
|
$
|
1.5
|
|
|
$
|
1.9
|
|
|
|
|
|
Accounts payable
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Accrued expenses and other
|
3.4
|
|
|
3.3
|
|
Total current liabilities
|
3.9
|
|
|
3.8
|
|
Total liabilities
|
$
|
3.9
|
|
|
$
|
3.8
|
|
5. INVENTORIES
The Company's inventory balances consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials and supplies
|
$
|
119.9
|
|
|
$
|
72.9
|
|
Work-in-process
|
19.7
|
|
|
33.5
|
|
Finished goods
|
415.8
|
|
|
318.2
|
|
|
$
|
555.4
|
|
|
$
|
424.6
|
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
6. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following table presents the changes in goodwill by segment during the
nine months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
Professional
|
|
Elizabeth Arden
|
|
Other
|
|
Total
|
Balance at January 1, 2017
|
$
|
227.5
|
|
|
$
|
240.3
|
|
|
$
|
221.7
|
|
|
$
|
—
|
|
|
$
|
689.5
|
|
Measurement Period Adjustments
(a)
|
—
|
|
|
—
|
|
|
12.3
|
|
|
—
|
|
|
12.3
|
|
Foreign currency translation adjustment
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Balance at September 30, 2017
|
$
|
227.5
|
|
|
$
|
241.6
|
|
|
$
|
234.0
|
|
|
$
|
—
|
|
|
$
|
703.1
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative goodwill impairment charges
(b)
|
$
|
(9.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(16.7
|
)
|
|
$
|
(26.4
|
)
|
(a)
Refer to Note 2, "Business Combinations," for more information on the Measurement Period Adjustments related to the Elizabeth Arden Acquisition.
(b)
Cumulative goodwill impairment charges relate to impairments recognized in 2015 within the Consumer segment and in 2016 within the Other segment.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Intangible Assets, Net
The following tables present details of the Company's total intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Useful Life (in Years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trademarks and Licenses
|
$
|
270.4
|
|
|
$
|
(67.4
|
)
|
|
$
|
203.0
|
|
|
13
|
Customer relationships
|
250.3
|
|
|
(41.7
|
)
|
|
208.6
|
|
|
13
|
Patents and Internally-Developed IP
|
20.8
|
|
|
(7.9
|
)
|
|
12.9
|
|
|
7
|
Distribution rights
|
31.0
|
|
|
(2.3
|
)
|
|
28.7
|
|
|
17
|
Other
|
1.3
|
|
|
(0.6
|
)
|
|
0.7
|
|
|
2
|
Total finite-lived intangible assets
|
$
|
573.8
|
|
|
$
|
(119.9
|
)
|
|
$
|
453.9
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade Names
|
$
|
147.0
|
|
|
$
|
—
|
|
|
$
|
147.0
|
|
|
|
Total indefinite-lived intangible assets
|
$
|
147.0
|
|
|
$
|
—
|
|
|
$
|
147.0
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
$
|
720.8
|
|
|
$
|
(119.9
|
)
|
|
$
|
600.9
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Useful Life (in Years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Trademarks and Licenses
|
$
|
177.9
|
|
|
$
|
(47.9
|
)
|
|
$
|
130.0
|
|
|
13
|
Customer relationships
|
247.6
|
|
|
(30.1
|
)
|
|
217.5
|
|
|
14
|
Patents and Internally-Developed IP
|
20.3
|
|
|
(6.1
|
)
|
|
14.2
|
|
|
8
|
Distribution rights
|
31.0
|
|
|
(0.5
|
)
|
|
30.5
|
|
|
18
|
Other
|
1.3
|
|
|
(0.2
|
)
|
|
1.1
|
|
|
3
|
Total finite-lived intangible assets
|
$
|
478.1
|
|
|
$
|
(84.8
|
)
|
|
$
|
393.3
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
Trade Names
|
$
|
243.3
|
|
|
$
|
—
|
|
|
$
|
243.3
|
|
|
|
Total indefinite-lived intangible assets
|
$
|
243.3
|
|
|
$
|
—
|
|
|
$
|
243.3
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
$
|
721.4
|
|
|
$
|
(84.8
|
)
|
|
$
|
636.6
|
|
|
|
Amortization expense for finite-lived intangible assets was
$10.4 million
and
$6.2 million
for the
three months ended September 30, 2017
and
2016
, respectively. Amortization expense for finite-lived intangible assets was
$32.6 million
and
$18.2 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following table reflects the estimated future amortization expense, a portion of which is subject to exchange rate fluctuations, for the Company's finite-lived intangible assets as of
September 30, 2017
:
|
|
|
|
|
|
Estimated Amortization Expense
|
2017
|
$
|
7.4
|
|
2018
|
39.4
|
|
2019
|
36.7
|
|
2020
|
36.0
|
|
2021
|
34.9
|
|
Thereafter
|
299.5
|
|
Total
|
$
|
453.9
|
|
7. ACCRUED EXPENSES AND OTHER
The Company's accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Compensation and related benefits
|
$
|
54.6
|
|
|
$
|
75.8
|
|
Advertising and promotional costs
|
75.4
|
|
|
66.7
|
|
Sales returns and allowances
|
50.6
|
|
|
51.9
|
|
Taxes
|
39.2
|
|
|
39.2
|
|
Restructuring reserve
|
21.9
|
|
|
38.0
|
|
Interest
|
10.3
|
|
|
24.4
|
|
Other
|
93.4
|
|
|
86.9
|
|
|
$
|
345.4
|
|
|
$
|
382.9
|
|
8
. LONG-TERM DEBT
The Company's debt balances consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
2016 Term Loan Facility: 2016 Term Loan due 2023, net of discounts and debt issuance costs
(a)
|
$
|
1,738.8
|
|
|
$
|
1,747.8
|
|
2016 Revolving Credit Facility due 2021, net of debt issuance costs
(b)
|
238.7
|
|
|
—
|
|
6.25% Senior Notes due 2024, net of debt issuance costs
(c)
|
440.0
|
|
|
439.1
|
|
5.75% Senior Notes due 2021, net of debt issuance costs
(d)
|
494.8
|
|
|
493.8
|
|
Spanish Government Loan due 2025
(e)
|
0.5
|
|
|
0.5
|
|
|
2,912.8
|
|
|
2,681.2
|
|
Less current portion
(*)
|
(256.8
|
)
|
|
(18.1
|
)
|
|
$
|
2,656.0
|
|
|
$
|
2,663.1
|
|
(*)
At
September 30, 2017
, the Company classified
$256.8 million
as its current portion of long-term debt, comprised primarily of
$238.7 million
of net borrowings under the 2016 Revolving Credit Facility and
$18.0 million
of amortization payments on the 2016 Term Loan Facility scheduled to be paid over the next four calendar quarters. At December 31, 2016, the Company classified
$18.1 million
as its current portion of long-term debt, comprised primarily of
$18.0 million
of amortization payments on the 2016 Term Loan Facility.
(a)
See Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K for certain details regarding Products Corporation's 2016 Term Loan that matures on the earlier of: (x) the seventh anniversary of the Elizabeth Arden Acquisition Date; and (y) the 91st day prior to the maturity of Products Corporation’s
5.75%
Senior Notes due 2021 if, on that date (and solely for so long as), (i) any
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
of Products Corporation's
5.75%
Senior Notes remain outstanding and (ii) Products Corporation’s available liquidity does not exceed the aggregate principal amount of the then outstanding
5.75%
Senior Notes by at least
$200.0 million
. The aggregate principal amount outstanding under the 2016 Term Loan Facility at September 30, 2017 was
$1,782.0 million
.
(b
)
See Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K for certain details regarding Products Corporation's 2016 Revolving Credit Facility, which matures on the earlier of: (x) the fifth anniversary of the Elizabeth Arden Acquisition Date; and (y) the 91st day prior to the maturity of Products Corporation’s
5.75%
Senior Notes if, on that date (and solely for so long as), (i) any of Products Corporation’s
5.75%
Senior Notes remain outstanding and (ii) Products Corporation’s available liquidity does not exceed the aggregate principal amount of the then outstanding
5.75%
Senior Notes by at least
$200.0 million
. Total borrowings at face amount under the 2016 Revolving Credit Facility at
September 30, 2017
were
$243.9 million
(excluding
$10.0 million
of outstanding undrawn letters of credit).
(c)
See Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K for certain details regarding Products Corporation's
6.25%
Senior Notes that mature on August 1, 2024. The aggregate principal amount outstanding under the
6.25%
Senior Notes at September 30, 2017 was
$450 million
.
(d)
See Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K for certain details regarding Products Corporation's
5.75%
Senior Notes that mature on February 15, 2021. The aggregate principal amount outstanding under the
5.75%
Senior Notes at September 30, 2017 was
$500 million
.
(e)
See Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K for certain details regarding the euro-denominated loan payable to the Spanish government that matures on June 30, 2025.
Covenants
Products Corporation was in compliance with all applicable covenants under the 2016 Senior Credit Facilities as of
September 30, 2017
. At
September 30, 2017
, the aggregate principal amounts outstanding under the 2016 Term Loan Facility and the 2016 Revolving Credit Facility were
$1,782.0 million
and
$243.9 million
, respectively. Availability under the
$400.0 million
2016 Revolving Credit Facility at
September 30, 2017
, based upon the calculated borrowing base of
$400.0 million
, less
$10.0 million
of outstanding undrawn letters of credit, less
$20.5 million
of outstanding checks and less
$243.9 million
then drawn on the 2016 Revolving Credit Facility, was
$125.6 million
.
Products Corporation was in compliance with all applicable covenants under the indentures governing Products Corporation's
6.25%
Senior Notes and
5.75%
Senior Notes (together, the "Senior Notes Indentures") as of
September 30, 2017
.
9. FAIR VALUE MEASUREMENTS
Assets and liabilities are required to be categorized into three levels of fair value based upon the assumptions used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing the fair value measurement of assets and liabilities are as follows:
|
|
•
|
Level 1: Fair valuing the asset or liability using observable inputs, such as quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: Fair valuing the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
|
|
|
•
|
Level 3: Fair valuing the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
As of
September 30, 2017
, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
FX Contracts
(a)
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
FX Contracts
(a)
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
2013 Interest Rate Swap
(b)
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
As of
December 31, 2016
, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
FX Contracts
(a)
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
FX Contracts
(a)
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
2013 Interest Rate Swap
(b)
|
4.7
|
|
|
—
|
|
|
4.7
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
5.8
|
|
|
$
|
—
|
|
|
$
|
5.8
|
|
|
$
|
—
|
|
(a)
The fair value of the Company’s foreign currency forward exchange contracts ("FX Contracts") was measured based on observable market transactions for similar transactions in actively quoted markets of spot and forward rates on the respective dates. See Note
10
, “Financial Instruments."
(b)
The fair value of Products Corporation's 2013 Interest Rate Swap (as hereinafter defined) was measured based on the implied forward rates from the U.S. Dollar three-month LIBOR yield curve on the respective dates. See Note
10
, “Financial Instruments.”
As of
September 30, 2017
, the fair value and carrying value of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Carrying Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
$
|
—
|
|
|
$
|
2,615.4
|
|
|
$
|
—
|
|
|
$
|
2,615.4
|
|
|
$
|
2,912.8
|
|
As of
December 31, 2016
, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Carrying Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
$
|
—
|
|
|
$
|
2,770.9
|
|
|
$
|
—
|
|
|
$
|
2,770.9
|
|
|
$
|
2,681.2
|
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The fair value of the Company's long-term debt, including the current portion of long-term debt, is based on quoted market prices for similar issues and maturities.
The carrying amounts of cash and cash equivalents, trade receivables, notes receivable, accounts payable and short-term borrowings approximate their respective fair values.
10
. FINANCIAL INSTRUMENTS
Products Corporation maintains standby and trade letters of credit for various corporate purposes under which Products Corporation is obligated, of which
$10.0 million
and
$10.4 million
(including amounts available under credit agreements in effect at that time) were maintained at
September 30, 2017
and
December 31, 2016
, respectively. Included in these amounts are approximately
$6.8 million
and
$7.3 million
at
September 30, 2017
and
December 31, 2016
, respectively, in standby letters of credit that support Products Corporation’s self-insurance programs. The estimated liability under such programs is accrued by Products Corporation.
Derivative Financial Instruments
The Company uses derivative financial instruments, primarily: (i) FX Contracts, intended for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates on the Company’s net cash flows; and (ii) interest rate hedging transactions, such as the 2013 Interest Rate Swap, intended for the purpose of managing interest rate risk associated with Products Corporation’s variable rate indebtedness.
Foreign Currency Forward Exchange Contracts
The FX Contracts are entered into primarily to hedge the anticipated net cash flows resulting from inventory purchases and intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year.
The U.S. Dollar notional amount of the FX Contracts outstanding at
September 30, 2017
and
December 31, 2016
was
$162.5 million
and
$79.6 million
, respectively.
Interest Rate Swap Transaction
In November 2013, Products Corporation executed a forward-starting floating-to-fixed interest rate swap transaction (the "2013 Interest Rate Swap") that, at its inception, was based on a notional amount of
$400 million
in respect of indebtedness under Products Corporation’s 2013 term loan, that was incurred in connection with completing the October 2013 acquisition of The Colomer Group (the "Old Acquisition Term Loan"). The 2013 Interest Rate Swap initially had a floor of
1.00%
that in December 2016 was amended to
0.75%
. In connection with entering into the 2016 Term Loan Facility, the 2013 Interest Swap was carried over to apply to a notional amount of
$400 million
in respect of indebtedness under such loan for the remaining balance of the term of such swap. The Company initially designated the 2013 Interest Rate Swap as a cash flow hedge of the variability of the forecasted three-month LIBOR interest rate payments initially related to the
$400 million
notional amount under the Old Acquisition Term Loan over the
three
-year term of the 2013 Interest Rate Swap (and subsequently to the
$400 million
notional amount under the 2016 Term Loan Facility for the remaining balance of the term of such swap). Under the terms of the 2013 Interest Rate Swap, commencing in May 2015, Products Corporation receives from the counterparty a floating interest rate based on the higher of the three-month U.S. Dollar LIBOR or the floor percentage in effect, while paying a fixed interest rate payment to the counterparty equal to
2.0709%
(which, with respect to the 2016 Term Loan Facility, effectively fixes the interest rate on such notional amount at
5.5709%
over the remaining balance of the
three
-year term of the 2013 Interest Rate Swap). At
September 30, 2017
, the fair value of the 2013 Interest Rate Swap was a liability of
$1.9 million
and the accumulated loss recorded in accumulated other comprehensive loss was
$1.2 million
, net of tax.
As a result of completely refinancing the Old Acquisition Term Loan with a portion of the proceeds from Product's Corporation's consummation of the 2016 Senior Credit Facilities and the
6.25%
Senior Notes Offering in connection with consummating the Elizabeth Arden Acquisition, the critical terms of the 2013 Interest Rate Swap no longer matched the terms of the underlying debt under the 2016 Term Loan Facility. At the refinancing date, which was the same as the September 7, 2016 Elizabeth Arden Acquisition Date (the "De-designation Date"), the 2013 Interest Rate Swap was determined to no longer be highly effective and the Company discontinued hedge accounting for the 2013 Interest Rate Swap. Following the de-designation of the 2013 Interest Rate Swap, changes in fair value are accounted for as a component of other non-operating expenses. Accumulated deferred losses of
$6.3 million
, or
$3.9 million
net of tax, at the De-designation Date, that were previously recorded as a component of accumulated other comprehensive loss, will be amortized into earnings over the remaining term of the 2013 Interest Rate Swap. At
September 30,
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
2017
,
$2.1 million
, or
$1.2 million
net of tax, remains as a component of accumulated other comprehensive loss related to the 2013 Interest Rate Swap. See "
Quantitative Information – Derivative Financial Instruments
" below.
The Company expects that
$1.2 million
of the deferred net losses, net of taxes, related to the 2013 Interest Rate Swap will be amortized into earnings over the next 12 months.
Credit Risk
Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of the derivative instruments in asset positions, which totaled
$0.5 million
and
$2.3 million
as of
September 30, 2017
and December 31, 2016, respectively. The Company attempts to minimize exposure to credit risk by generally entering into derivative contracts with counterparties that have investment-grade credit ratings and are major financial institutions. The Company also periodically monitors any changes in the credit ratings of its counterparties. Given the current credit standing of the Company's counterparties to its derivative instruments, the Company believes that the risk of loss under these derivative instruments arising from any non-performance by any of the counterparties is remote.
Quantitative Information – Derivative Financial Instruments
The fair values of the Company's derivative financial instruments in its Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
Assets
|
|
Liabilities
|
|
Balance Sheet
|
|
September 30,
2017
|
|
December 31,
2016
|
|
Balance Sheet
|
|
September 30,
2017
|
|
December 31,
2016
|
|
Classification
|
|
Fair Value
|
|
Fair Value
|
|
Classification
|
|
Fair Value
|
|
Fair Value
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
FX Contracts
(a)
|
Prepaid expenses and other
|
|
$
|
0.5
|
|
|
$
|
2.3
|
|
|
Accrued Expenses
|
|
$
|
2.9
|
|
|
$
|
1.1
|
|
2013 Interest Rate Swap
(b)
|
Prepaid expenses and other
|
|
—
|
|
|
—
|
|
|
Accrued expenses and other
|
|
1.9
|
|
|
3.7
|
|
|
Other assets
|
|
—
|
|
|
—
|
|
|
Other long-term liabilities
|
|
—
|
|
|
1.0
|
|
(a)
The fair values of the FX Contracts at
September 30, 2017
and
December 31, 2016
were measured based on observable market transactions of spot and forward rates at
September 30, 2017
and
December 31, 2016
, respectively.
(b)
The fair values of the 2013 Interest Rate Swap at
September 30, 2017
and
December 31, 2016
were measured based on the implied forward rates from the U.S. Dollar three-month LIBOR yield curve at
September 30, 2017
and
December 31, 2016
, respectively.
The effects of the Company's derivative financial instruments on its Consolidated Statements of Operations and Comprehensive (Loss) Income were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Other Comprehensive (Loss) Income
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Derivatives previously designated as hedging instruments:
|
|
|
|
|
|
|
|
2013 Interest Rate Swap, net of tax
(a)
|
$
|
0.6
|
|
|
$
|
0.8
|
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
(a)
Net of tax benefit of
$0.4 million
and
$0.5 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$1.1 million
and
$0.1 million
for the
nine months ended September 30, 2017
and
2016
, respectively.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Classification
|
|
Amount of Gain (Loss) Recognized in Net (Loss) Income
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
2013 Interest Rate Swap
|
Interest Expense
|
|
$
|
(0.9
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(3.2
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
FX Contracts
|
Foreign currency gain (loss), net
|
|
$
|
(2.4
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(0.8
|
)
|
2013 Interest Rate Swap
|
Miscellaneous, net
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
11
. PENSION AND POST-RETIREMENT BENEFITS
The components of net periodic benefit costs (income) for the Company’s pension and the other post-retirement benefit plans for the third quarter of
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other
Post-Retirement
Benefit Plans
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net periodic benefit costs (income):
|
|
Service cost
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
4.9
|
|
|
5.2
|
|
|
0.1
|
|
|
0.1
|
|
Expected return on plan assets
|
(7.1
|
)
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
2.3
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit costs (income)
|
$
|
0.7
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
In the three months ended
September 30,
2017
, the Company recognized net periodic benefit cost of
$0.8 million
, compared to net periodic benefit income of
$0.1 million
in the three months ended
September 30,
2016
. The increase in costs was primarily due to lower expected return on plan assets and higher service costs during the three months ended September 30,
2017
.
The components of net periodic benefit costs (income) for the Company's pension and other post-retirement benefit plans for the first nine months of
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other
Post-Retirement
Benefit Plans
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net periodic benefit costs (income):
|
|
Service cost
|
$
|
1.9
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
14.7
|
|
|
15.5
|
|
|
0.3
|
|
|
0.3
|
|
Expected return on plan assets
|
(21.4
|
)
|
|
(23.3
|
)
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
7.1
|
|
|
6.6
|
|
|
0.2
|
|
|
0.1
|
|
Curtailment gain
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit costs (income)
|
1.5
|
|
|
(0.8
|
)
|
|
0.5
|
|
|
0.4
|
|
Portion allocated to Revlon Holdings
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
$
|
1.4
|
|
|
$
|
(0.9
|
)
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
In the
nine months ended
September 30,
2017
, the Company recognized net periodic benefit cost of
$1.9 million
, compared to net periodic benefit income of
$0.5 million
in the
nine months ended
September 30,
2016
. The increase in costs was primarily
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
due to lower expected return on plan assets and higher service cost during the nine months ended
September 30,
2017
, partially offset by a curtailment gain resulting from a certain foreign non-qualified benefit plan.
Net periodic benefit costs (income) are reflected in the Company's Consolidated Financial Statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net periodic benefit costs (income):
|
|
|
|
|
|
|
|
Cost of sales
|
$
|
(2.5
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(1.9
|
)
|
Selling, general and administrative expense
|
3.3
|
|
|
0.5
|
|
|
2.7
|
|
|
1.4
|
|
Total net periodic benefit costs (income)
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
1.9
|
|
|
$
|
(0.5
|
)
|
The Company expects that it will have net periodic benefit cost of approximately
$3.0 million
for its pension and other post-retirement benefit plans for all of
2017
, compared with net periodic benefit income of
$0.6 million
in 2016.
During the
third quarter
of
2017
,
$1.7 million
and
$0.2 million
were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During the first nine months of
2017
,
$5.2 million
and
$0.6 million
were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During
2017
, the Company expects to contribute approximately
$10.0 million
in the aggregate to its pension and other post-retirement benefit plans.
Relevant aspects of the qualified defined benefit pension plans, non-qualified pension plans and other post-retirement benefit plans sponsored by Products Corporation are disclosed in Note 14, "Pension and Post-Retirement Benefits," to the Consolidated Financial Statements in Revlon's 2016 Form 10-K.
12. INCOME TAXES
The Company's provision for income taxes represents federal, foreign, state and local income taxes. The Company's effective tax rate differs from the applicable federal statutory rate due to the effect of state and local income taxes, tax rates and income in foreign jurisdictions, foreign earnings taxable in the U.S., non-deductible expenses and other items. The Company’s tax provision changes quarterly based on various factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, foreign, state and local income taxes, tax audit settlements and the interaction of various global tax strategies.
For the
third quarter
of
2017
and
2016
, the Company recorded a benefit from income taxes of $
10.8 million
and $
0.4 million
, respectively. The $
10.4 million
increase in the benefit from income taxes was primarily due to the level and mix of earnings between jurisdictions.
The Company recorded a benefit from income taxes of
$37.8 million
for the first nine months of
2017
and a provision for income taxes of $
16.0 million
for first nine months of
2016
, respectively. The
$53.8 million
decrease in the provision for income taxes was primarily due to the pre-tax loss from continuing operations in the first nine months of 2017.
The Company's effective tax rate for the
three months ended September 30, 2017
was lower than the federal statutory rate of
35%
as a result of the level and mix of earnings between jurisdictions, foreign dividends and earnings taxable in the U.S., partially offset by the effect of certain favorable discrete items.
The Company's effective tax rate for the
nine months ended September 30, 2017
was lower than the federal statutory rate of
35%
as a result of the level and mix of earnings between jurisdictions, foreign dividends and earnings taxable in the U.S., and state and local taxes, partially offset by the effect of certain favorable discrete items.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of
September 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Actuarial (Loss) Gain on Post-retirement Benefits
|
|
Deferred Gain (Loss) - Hedging
|
|
Other
|
|
Accumulated Other Comprehensive Loss
|
Balance at January 1, 2017
|
$
|
(24.0
|
)
|
|
$
|
(224.4
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(251.7
|
)
|
Currency translation adjustment, net of tax of $1.5 million
|
5.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.3
|
|
Amortization of pension related costs, net of tax of $1.3 million
(a)
|
—
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
Amortization of deferred losses related to the de-designated 2013 Interest Rate Swap, net of tax benefit of $1.1 million
(b)
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
Curtailment gain, net of tax of $0.3 million
(c)
|
—
|
|
|
2.6
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
Other comprehensive income
|
$
|
5.3
|
|
|
$
|
8.7
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
15.8
|
|
Balance at September 30, 2017
|
$
|
(18.7
|
)
|
|
$
|
(215.7
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(235.9
|
)
|
|
|
(a)
|
Amounts represent the change in accumulated other comprehensive loss as a result of the amortization of actuarial losses (gains) arising during each year related to the Company’s pension and other post-retirement plans. See Note 11, “Pension and Post-retirement Benefits,” for further discussion of the Company’s pension and other post-retirement plans.
|
|
|
(b)
|
See Note
10
, "Financial Instruments," for further discussion of the 2013 Interest Rate Swap.
|
|
|
(c)
|
As a result of the Elizabeth Arden Acquisition, the Company recognized
$2.6 million
in curtailment gains related to a foreign non-qualified defined benefit plan of Elizabeth Arden.
|
As shown above, other comprehensive income includes changes in the fair value of the 2013 Interest Rate Swap prior to de-designation. Following is a roll-forward of the amounts reclassified out of accumulated other comprehensive loss into earnings as of
September 30, 2017
:
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at June 30, 2017
|
|
$
|
(1.8
|
)
|
Reclassifications into earnings (net of $0.4 million tax benefit)
(a)
|
|
0.6
|
|
Ending accumulated losses at September 30, 2017
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at December 31, 2016
|
|
$
|
(3.0
|
)
|
Reclassifications into earnings (net of $1.1 million tax benefit)
(a)
|
|
1.8
|
|
Ending accumulated losses at September 30, 2017
|
|
$
|
(1.2
|
)
|
|
|
(a)
|
Reclassified to interest expense.
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Following is a roll-forward of the amounts reclassified out of accumulated other comprehensive loss into earnings as of
September 30, 2016
:
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at June 30, 2016
|
|
$
|
(4.5
|
)
|
Reclassifications into earnings (net of $0.4 million tax benefit)
(a)
|
|
0.7
|
|
Change in fair value (net of $0.1 million tax benefit)
|
|
0.1
|
|
Ending accumulated losses at September 30, 2016
|
|
$
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at December 31, 2015
|
|
$
|
(3.8
|
)
|
Reclassifications into earnings (net of $1.2 million tax expense)
(a)
|
|
2.0
|
|
Change in fair value (net of $1.1 million tax benefit)
|
|
(1.9
|
)
|
Ending accumulated losses at September 30, 2016
|
|
$
|
(3.7
|
)
|
|
|
(a)
|
Reclassified to interest expense.
|
14
. SEGMENT DATA AND RELATED INFORMATION
Operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company's “Chief Executive Officer”) in deciding how to allocate resources and in assessing the Company's performance. As a result of the similarities in the procurement, manufacturing and distribution processes for the Company’s products, much of the information provided in the Unaudited Consolidated Financial Statements, and provided in the segment table below, is similar to, or the same as, that reviewed on a regular basis by the Company's Chief Executive Officer. As of
September 30, 2017
, and since the Elizabeth Arden Acquisition Date, the Elizabeth Arden organization has continued to operate and be evaluated on a stand-alone basis.
At
September 30, 2017
, the Company’s operations are organized into the following reportable segments:
|
|
•
|
Consumer
- The Company’s Consumer segment is comprised of products that are marketed, distributed and sold in large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, the Internet/e-commerce, television shopping, department stores, one-stop shopping beauty retailers, specialty cosmetic stores and perfumeries in the U.S. and internationally under brands such as
Revlon
,
Almay
,
SinfulColors
and
Pure Ice
in cosmetics;
Revlon ColorSilk
in women’s hair color;
Revlon
in beauty tools; and
Mitchum
in anti-perspirant deodorants. The Consumer segment also includes a skin care line under the
Natural Honey
brand and hair color line under the
Llongueras
brand (licensed from a third party) that are sold in large volume retailers and other retailers, primarily in Spain, as well as
Cutex
nail care products.
|
|
|
•
|
Elizabeth Arden
- The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics to prestige retailers, specialty stores, the mass retail channel, distributors, perfumeries, department stores, boutiques, travel retailers and other retailers in the U.S. and internationally, as well as direct sales to consumers via its Elizabeth Arden Red Door branded retail stores, Elizabeth Arden.com e-commerce business and Elizabeth Arden Red Door spa beauty salons and spas under brands such as
Skin Illuminating, SUPERSTART, Prevage, Eight Hour Cream, Elizabeth Arden Ceramide
and
Visible Difference
in the Elizabeth Arden skin care brands;
Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue
,
Elizabeth Arden Green Tea
and
UNTOLD
in Elizabeth Arden fragrances;
Juicy Couture, John Varvatos
and
Wildfox Couture
in designer fragrances; and
Curve, Elizabeth Taylor
,
Britney Spears
,
Christina Aguilera
,
Halston,
Ed Hardy
,
Geoffrey Beene
,
Alfred Sung
,
Giorgio Beverly Hills
,
Lucky Brand
,
PS Fine Cologne for Men
,
White Shoulders
and
Jennifer Aniston
in heritage fragrances.
|
|
|
•
|
Professional
- The Company’s Professional segment markets, distributes and sells professional products primarily to hair and nail salons and professional salon distributors in the U.S. and internationally under brands such as
Revlon Professional
in hair color, hair care and hair treatments;
CND
in nail polishes and nail enhancements, including
CND Shellac
and
CND Vinylux
nail polishes; and
American Crew
in men’s grooming products. The Professional segment also includes a multi-cultural hair care line consisting of
Creme of Nature
hair care products, which are sold in both professional salons and in large volume retailers and other retailers, primarily in the U.S.
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
|
|
•
|
Other
- The Other segment includes the operating results related to the development, marketing and distribution of certain licensed fragrances and other beauty products. The results included within the Other segment are not material to the Company’s consolidated results of operations.
|
The Company's management evaluates segment profit, which is defined as income from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses, for each of the Company's reportable segments. Segment profit also excludes unallocated corporate expenses and the impact of certain items that are not directly attributable to the reportable segments' underlying operating performance, which includes the impacts of: (i) restructuring and related charges; (ii) acquisition and integration costs; (iii) deferred compensation costs; (iv) costs of sales resulting from a fair value adjustment to inventory acquired in the Elizabeth Arden Acquisition; and (v) charges related to the Elizabeth Arden 2016 Business Transformation Program. Such items are shown below in the table reconciling segment profit to consolidated income from continuing operations before income taxes. Unallocated corporate expenses primarily include general and administrative expenses related to the corporate organization. These expenses are recorded in unallocated corporate expenses, as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any material inter-segment sales.
The accounting policies for each of the reportable segments are the same as those described in Note 1, “Description of Business and Summary of Significant Accounting Policies.” The Company's assets and liabilities are managed centrally and are reported internally in the same manner as the Unaudited Consolidated Financial Statements; thus, no additional information regarding assets and liabilities of the Company’s reportable segments is produced for the Company's Chief Executive Officer or included in these Unaudited Consolidated Financial Statements.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following table is a comparative summary of the Company’s net sales and segment profit by reportable segment for each of the three and
nine months ended September 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment Net Sales:
|
|
|
|
|
|
|
|
Consumer
|
$
|
306.7
|
|
|
$
|
342.8
|
|
|
$
|
932.8
|
|
|
$
|
1,022.3
|
|
Elizabeth Arden
|
248.1
|
|
|
135.2
|
|
|
639.3
|
|
|
135.2
|
|
Professional
|
107.0
|
|
|
118.8
|
|
|
320.4
|
|
|
357.2
|
|
Other
|
4.7
|
|
|
8.0
|
|
|
14.6
|
|
|
18.6
|
|
Total
|
$
|
666.5
|
|
|
$
|
604.8
|
|
|
$
|
1,907.1
|
|
|
$
|
1,533.3
|
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
Consumer
|
$
|
33.0
|
|
|
$
|
81.0
|
|
|
$
|
134.5
|
|
|
$
|
220.4
|
|
Elizabeth Arden
|
31.6
|
|
|
32.5
|
|
|
65.5
|
|
|
32.5
|
|
Professional
|
18.9
|
|
|
23.7
|
|
|
44.5
|
|
|
73.4
|
|
Other
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(2.5
|
)
|
|
(0.9
|
)
|
Total
|
$
|
82.5
|
|
|
$
|
137.1
|
|
|
$
|
242.0
|
|
|
$
|
325.4
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
Segment Profit
|
$
|
82.5
|
|
|
$
|
137.1
|
|
|
$
|
242.0
|
|
|
$
|
325.4
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
28.9
|
|
|
24.2
|
|
|
95.2
|
|
|
59.1
|
|
Depreciation and amortization
|
37.9
|
|
|
28.8
|
|
|
111.7
|
|
|
81.0
|
|
Non-cash stock compensation expense
|
1.5
|
|
|
1.5
|
|
|
5.9
|
|
|
4.8
|
|
Non-Operating items:
|
|
|
|
|
|
|
|
Restructuring and related charges
|
6.6
|
|
|
0.5
|
|
|
12.3
|
|
|
2.3
|
|
Acquisition and integration costs
|
12.7
|
|
|
33.5
|
|
|
40.2
|
|
|
39.5
|
|
Elizabeth Arden 2016 Business Transformation Program
|
0.1
|
|
|
1.7
|
|
|
0.8
|
|
|
1.7
|
|
Elizabeth Arden inventory purchase accounting adjustment, cost of sales
|
—
|
|
|
4.2
|
|
|
17.2
|
|
|
4.2
|
|
Cutex International inventory purchase accounting adjustment, cost of sales
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.3
|
|
Deferred compensation
|
0.3
|
|
|
0.8
|
|
|
2.0
|
|
|
2.6
|
|
Operating (loss) income
|
(5.5
|
)
|
|
41.7
|
|
|
(43.3
|
)
|
|
129.9
|
|
Less:
|
|
|
|
|
|
|
|
Interest Expense
|
38.6
|
|
|
27.4
|
|
|
110.3
|
|
|
69.3
|
|
Amortization of debt issuance costs
|
2.3
|
|
|
1.7
|
|
|
6.8
|
|
|
4.6
|
|
Loss on early extinguishment of debt
|
—
|
|
|
16.9
|
|
|
—
|
|
|
16.9
|
|
Foreign currency (gains) losses, net
|
(3.1
|
)
|
|
1.2
|
|
|
(16.8
|
)
|
|
6.3
|
|
Miscellaneous, net
|
0.3
|
|
|
(0.6
|
)
|
|
1.8
|
|
|
(0.1
|
)
|
(Loss) income from continuing operations before income taxes
|
$
|
(43.6
|
)
|
|
$
|
(4.9
|
)
|
|
$
|
(145.4
|
)
|
|
$
|
32.9
|
|
As of
September 30, 2017
, after giving effect to the Elizabeth Arden Acquisition, the Company had operations established in
27
countries outside of the U.S. and its products are sold throughout the world. Generally, net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
311.7
|
|
|
47%
|
|
$
|
326.1
|
|
|
54%
|
|
$
|
916.2
|
|
|
48%
|
|
$
|
836.8
|
|
|
55%
|
International
|
354.8
|
|
|
53%
|
|
278.7
|
|
|
46%
|
|
990.9
|
|
|
52%
|
|
696.5
|
|
|
45%
|
|
$
|
666.5
|
|
|
|
|
$
|
604.8
|
|
|
|
|
$
|
1,907.1
|
|
|
|
|
$
|
1,533.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Long-lived assets, net:
|
|
|
|
|
|
|
United States
|
$
|
1,478.2
|
|
|
84%
|
|
$
|
1,494.3
|
|
|
85%
|
International
|
283.9
|
|
|
16%
|
|
255.4
|
|
|
15%
|
|
$
|
1,762.1
|
|
|
|
$
|
1,749.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Classes of similar products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Color cosmetics
|
$
|
221.3
|
|
|
33%
|
|
$
|
245.5
|
|
|
41%
|
|
$
|
681.6
|
|
|
36%
|
|
$
|
731.7
|
|
|
48%
|
Fragrance
|
197.6
|
|
|
30%
|
|
127.8
|
|
|
21%
|
|
487.7
|
|
|
26%
|
|
154.9
|
|
|
10%
|
Hair care
|
126.0
|
|
|
19%
|
|
135.3
|
|
|
22%
|
|
383.7
|
|
|
20%
|
|
402.1
|
|
|
26%
|
Beauty care
|
69.3
|
|
|
10%
|
|
94.1
|
|
|
16%
|
|
198.0
|
|
|
10%
|
|
236.9
|
|
|
15%
|
Skin care
|
52.3
|
|
|
8%
|
|
2.1
|
|
|
—%
|
|
156.1
|
|
|
8%
|
|
7.7
|
|
|
1%
|
|
$
|
666.5
|
|
|
|
|
$
|
604.8
|
|
|
|
|
$
|
1,907.1
|
|
|
|
|
$
|
1,533.3
|
|
|
|
15. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Shares used in basic (loss) earnings per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted (loss) earnings per share include the dilutive effect of unvested restricted stock under the Company’s Stock Plan using the treasury stock method. For the three and
nine months ended
September 30,
2017, diluted loss per share equals basic loss per share as the assumed vesting of restricted stock would have an anti-dilutive effect. At
September 30, 2017
and
2016
, there were
no
outstanding stock options under the Company's Stock Plan.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Following are the components of basic and diluted (loss) earnings per common share for the three and
nine months ended September 30, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of taxes
|
$
|
(32.8
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(107.6
|
)
|
|
$
|
16.9
|
|
Income (loss) from discontinued operations, net of taxes
|
0.4
|
|
|
(0.2
|
)
|
|
1.3
|
|
|
(2.3
|
)
|
Net (loss) income
|
$
|
(32.4
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(106.3
|
)
|
|
$
|
14.6
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic
|
52,615,412
|
|
|
52,498,246
|
|
|
52,584,954
|
|
|
52,498,840
|
|
Effect of dilutive restricted stock
|
—
|
|
|
—
|
|
|
—
|
|
|
118,900
|
|
Weighted average common shares outstanding – Diluted
|
52,615,412
|
|
|
52,498,246
|
|
|
52,584,954
|
|
|
52,617,740
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.62
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
0.32
|
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
0.02
|
|
|
(0.04
|
)
|
Net (loss) income
|
$
|
(0.61
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
0.28
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.62
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.04
|
)
|
|
$
|
0.32
|
|
Discontinued operations
|
0.01
|
|
|
—
|
|
|
0.02
|
|
|
(0.04
|
)
|
Net (loss) income
|
$
|
(0.61
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards under the Stock Plan
(a)
|
19,506
|
|
|
—
|
|
|
19,486
|
|
|
—
|
|
(a)
These are outstanding common stock equivalents that were not included in the computation of diluted earnings per common share because their inclusion would have had an anti-dilutive effect.
16. CONTINGENCIES
The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
As previously disclosed, following the announcement of the execution of the Elizabeth Arden Merger Agreement, several putative shareholder class action lawsuits and a derivative lawsuit were filed challenging the Merger. In addition to the complaints filed on behalf of plaintiffs Parker, Christiansen, Ross and Stein on July 25, 2016, a lawsuit (Hutson v. Elizabeth Arden, Inc., et al., Case No. CACE-16-013566) (referred to as the “Hutson complaint”) was filed in the Seventeenth Judicial Circuit in and for Broward County, Florida (the “Court”) against Elizabeth Arden, the members of the board of directors of Elizabeth Arden, Revlon, Products Corporation and Acquisition Sub. In general, the Hutson complaint alleges that: (i) the members of Elizabeth Arden’s board of directors breached their fiduciary duties to Elizabeth Arden’s shareholders with respect to the Merger, by, among other things, approving the Merger pursuant to an unfair process and at an inadequate and unfair price; and (ii) Revlon, Products Corporation and Acquisition Sub aided and abetted the breaches of fiduciary duty by the members of Elizabeth Arden’s board. The plaintiff seeks relief similar to that sought in the Parker case.
By Order dated August 4, 2016, all
five
cases were consolidated by the Court into a Consolidated Amended Class Action. Thereafter, on August 11, 2016 a Consolidated Amended Class Action Complaint was filed, seeking to enjoin defendants from consummating the Merger and/or from soliciting shareholder votes. To the extent that the Merger was consummated, the Consolidated Amended Class Action Complaint seeks to rescind the Merger or recover rescissory or other compensatory damages, along with costs and fees. The grounds for relief set forth in the Consolidated Amended Class Action Complaint in large part track those grounds as asserted in the
five
individual complaints, as previously disclosed. Class counsel advised that post consummation of the Merger they were going to file a Second Consolidated Amended Class Action Complaint. The Second Consolidated Amended Class Action Complaint (which superseded the Consolidated Amended Class Action Complaint) was ultimately filed on or about
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
January 26, 2017. Like the Consolidated Amended Class Action complaint, the grounds for relief set forth in the Second Consolidated Amended Class Action Complaint in large part track those grounds as asserted in the
five
individual complaints.
The Company believes the allegations contained in the Second Consolidated Amended Class Action Complaint are without merit and intends to vigorously defend against them. Additional lawsuits arising out of or relating to the Elizabeth Arden Merger Agreement or the Merger may be filed in the future. The defendants' motions to dismiss the Second Consolidated Amended Class Action Complaint were filed on March 28, 2017. Plaintiffs' response was filed on June 6, 2017 and defendants' replies were filed on July 13, 2017. A hearing on the defendants' motion to dismiss was held on September 19, 2017 and the parties await the Court's decision.
The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.
17. RELATED PARTY TRANSACTIONS
Reimbursement Agreements
Pursuant to the previously disclosed reimbursement agreements (the "Reimbursement Agreements") between Revlon, Products Corporation and MacAndrews & Forbes Inc. (a wholly-owned subsidiary of MacAndrews & Forbes): (i) MacAndrews & Forbes is obligated to provide (directly or through its affiliates) certain professional and administrative services, including, without limitation, employees, to the Company, and to purchase services from third-party providers, such as insurance, legal, accounting and air transportation services, on behalf of the Company, to the extent requested by Products Corporation; and (ii) Products Corporation is obligated to provide certain professional and administrative services, including, without limitation, employees, to MacAndrews & Forbes and to purchase services from third-party providers, such as insurance, legal and accounting services, on behalf of MacAndrews & Forbes, to the extent requested by MacAndrews & Forbes, provided that in each case the performance of such services does not cause an unreasonable burden to MacAndrews & Forbes or Products Corporation, as the case may be.
The Company reimburses MacAndrews & Forbes for the allocable costs of the services that MacAndrews & Forbes purchases for or provides to the Company and for the reasonable out-of-pocket expenses that MacAndrews & Forbes incurs in connection with the provision of such services. MacAndrews & Forbes reimburses Products Corporation for the allocable costs of the services that Products Corporation purchases for or provides to MacAndrews & Forbes and for the reasonable out-of-pocket expenses incurred by Products Corporation in connection with the purchase or provision of such services. Each of the Company, on the one hand, and MacAndrews & Forbes, on the other, has agreed to indemnify the other party for losses arising out of the services provided by it under the Reimbursement Agreements, other than losses resulting from its willful misconduct or gross negligence.
The Reimbursement Agreements may be terminated by either party on
90
days' notice. The Company does not intend to request services under the Reimbursement Agreements unless their costs would be at least as favorable to the Company as could be obtained from unaffiliated third parties.
The Company participates in MacAndrews & Forbes' directors and officers liability insurance program (the “D&O Insurance Program”), as well as its other insurance coverages, such as property damage, business interruption, liability and other coverages, which cover the Company, as well as MacAndrews & Forbes and its subsidiaries. The limits of coverage for certain of the policies are available on an aggregate basis for losses to any or all of the participating companies and their respective directors and officers. The Company reimburses MacAndrews & Forbes from time-to-time for their allocable portion of the premiums for such coverage or the Company pays the insurers directly, which premiums the Company believes are more favorable than the premiums that the Company would pay were it to secure stand-alone coverage. Any amounts paid by the Company directly to MacAndrews & Forbes in respect of premiums are included in the amounts paid under the Reimbursement Agreements.
The net activity related to services purchased under the Reimbursement Agreements during the
nine months ended September 30, 2017
and
2016
was
$3.6 million
and
$1.3 million
, respectively, which primarily included partial payments made by the Company to MacAndrews & Forbes during the first quarter of
2017
and
2016
for premiums related to the Company's allocable portion of the
5
-year renewal of the D&O Insurance Program for the period from January 31, 2012 through January 31, 2017 (which insurance coverage was renewed in January 2017 through January 2020). As of
September 30, 2017
and
December 31, 2016
, a receivable balance of
$0.5 million
and a payable balance of
$0.2 million
, respectively, from MacAndrews & Forbes was included in the Company's Consolidated Balance Sheet for transactions subject to the Reimbursement Agreements.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Other
During the
nine months ended September 30, 2017
and
2016
, the Company engaged several companies in which MacAndrews & Forbes had a controlling interest to provide the Company with various ordinary course business services. These services included processing approximately
$24.4 million
and
$35.1 million
of coupon redemptions for the Company's retail customers for the
nine months ended September 30, 2017
and
2016
, respectively, for which the Company paid fees of approximately
$0.2 million
and
$0.3 million
for the
nine months ended September 30, 2017
and
2016
, respectively, and other similar advertising, coupon redemption and raw material supply services, for which the Company paid fees aggregating to approximately
$0.3 million
for each of the
nine months ended September 30, 2017
and
2016
. The Company believes that its engagement of each of these affiliates was on arm's length terms, taking into account each firm's expertise in its respective field, and that the fees paid were at least as favorable as those available from unaffiliated parties.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Overview of the Business
Revlon, Inc. ("Revlon" and together with its subsidiaries, the "Company") conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation ("Products Corporation"), and its subsidiaries, including Elizabeth Arden, Inc. (“Elizabeth Arden”). Revlon is an indirect majority-owned subsidiary of MacAndrews & Forbes Incorporated (together with certain of its affiliates other than the Company, "MacAndrews & Forbes"), a corporation wholly-owned by Ronald O. Perelman.
The Company operates in four segments: the consumer division (“Consumer”); the professional division (“Professional”); Elizabeth Arden; and Other. The Company manufactures, markets and sells an extensive array of beauty and personal care products worldwide, including color cosmetics, fragrances, skin care, hair color, hair care and hair treatments, beauty tools, men's grooming products, anti-perspirant deodorants and other beauty care products.
On September 7, 2016 (the "Acquisition Date"), the Company completed the acquisition of Elizabeth Arden (the “Elizabeth Arden Acquisition”). The results of operations for the Elizabeth Arden business are presented in the Elizabeth Arden segment and are included in the Company’s Consolidated Financial Statements commencing on the Acquisition Date. Refer to Note 2, "Business Combinations," to the Unaudited Consolidated Financial Statements in this Form 10-Q for further details related to the Elizabeth Arden Acquisition.
The Company's Business Strategy for Value Creation
Our strategy is based on three key pillars:
Strengthen Our Portfolio of Brands.
The Company intends to continue to develop the leadership and aspiration for our flagship brands; Revlon, Elizabeth Arden and Almay. The Company is continuing to develop our product offerings across beauty segments with a focus on large and/or fast growing categories. We are leveraging our creativity, insights and agility to accelerate innovation to develop trend-relevant and first-of-its kind beauty solutions. We aim to delight our customers with high performing products, superior services and unique experiences that exceed their expectations. And we will continue to communicate our brands' heritage, expertise and purpose to create authentic, meaningful and lasting connections with consumers of all ages.
Strategically Expand Consumer's Access to Our Brands.
The Company is taking steps to ensure that consumers have real-time access to our brands wherever and however they shop for beauty. We are strengthening and diversifying our channels, especially direct to consumer. We are accelerating our development in high-growth channels, with a focus on specialty, e-commerce and m-commerce. Our goal is to continue to win in traditional channels (including mass, drug, selective and department stores) and expand our combined reach into travel retail. The Company is taking actions to strengthen its position in the U.S., to ensure our growth base and expand into untapped geographic regions, with a focus on growth in Asia.
Develop a Cost Structure That Fuels Investment in Our Brands.
The Company aims to grow profitably, improve our operating performance and align our strategic investments behind the biggest growth opportunities and innovation that differentiates our brands. We continue to improve our category mix by shifting toward higher gross margin categories (e.g., skin care and fragrance) and we aim to reduce sales returns, markdowns and inventory levels. Our objective is to continue to optimize our resource allocation.
Changes in consumer shopping patterns for beauty products in which consumers have continued to increasingly engage with beauty brands through e-commerce and other social media channels have resulted in slower retail traffic in brick-and-mortar stores in the mass retail channel in North America. This shift in consumer behavior has resulted in continuing declines in the brick-and-mortar retail channel that the Company expects will persist over time. To address the pace and impact of this new commercial landscape, the Company has shifted some of its brand marketing spend toward enhancing its e-commerce and social media capabilities to ensure that consumers have real-time access to our brands wherever and however they shop for beauty and facilitate increased penetration of e-commerce and social media channels.
The Company believes that its renewed focus on e-commerce and its evolving marketing and sales initiatives will support the foundation for driving a successful long-term omni-channel strategy and significantly increase its e-commerce penetration. In July 2017, the Company appointed Grey as its new global creative agency of record to provide integrated communications services, including traditional and digital advertising and promotion and activation marketing for the Company’s brands, including
Revlon
,
Elizabeth Arden
,
Almay
,
CND
,
Cutex
and
SinfulColors
, along with many of its key fragrance brands, including
Charlie
,
Britney Spears
,
Curve
,
Tapout
and
Elizabeth Taylor
. To drive its digital transformation, the Company engaged Sapient Razorfish during
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
the third quarter of 2017 to assist the Company on the following e-commerce initiatives: (i) developing and implementing effective content to enhance the Company's online retail position; (ii) improving the Company's consumer engagement across social media platforms; and (iii) transforming the Company's technology and data to support efficient management of the Company's digital infrastructure.
While executing these strategic initiatives may increase the Company’s expenses and debt, they are expected to have a long-term positive impact on the Company’s overall revenues and profitability.
Overview of Net Sales and Earnings Results
Consolidated net sales in the
third quarter
of
2017
were
$666.5 million
, a
$61.7 million
increase
, or
10.2%
, as compared to
$604.8 million
in the third quarter of 2016. Excluding the
$4.2 million
favorable
impact of foreign currency fluctuations (referred to herein as "FX," "XFX" or on an "XFX basis"), consolidated net sales
increased
by
$57.5 million
, or
9.5%
, during the
third quarter
of
2017
. The XFX
increase
in the
third quarter
of
2017
was primarily driven by a
$112.9 million
increase in net sales as a result of the Elizabeth Arden Acquisition completed in September 2016; partially offset by a $
37.5 million
, or
10.9%
,
decrease
in Consumer segment net sales and a $
14.6 million
, or
12.3%
,
decrease
in Professional segment net sales.
Consolidated net sales in
the first nine months of 2017
were
$1,907.1 million
, a
$373.8 million
increase
, or
24.4%
, as compared to
$1,533.3 million
in
the first nine months of 2016
. Excluding the
$3.8 million
unfavorable
FX impact, consolidated net sales
increased
by
$377.7 million
, or
24.6%
, during
the first nine months of 2017
. The XFX
increase
in
the first nine months of 2017
was primarily driven by a
$504.1 million
increase in net sales as a result of the Elizabeth Arden Acquisition completed in September 2016; partially offset by a
$86.9 million
, or
8.5%
,
decrease
in Consumer segment net sales and a
$36.9 million
, or
10.3%
,
decrease
in Professional segment net sales.
Consolidated loss from continuing operations, net of taxes, in the
third quarter
of
2017
was
$32.8 million
, compared to consolidated loss from continuing operations of
$4.5 million
, net of taxes, in the third quarter of
2016
. The
$28.3 million
decrease
in consolidated income from continuing operations, net of taxes, in the
third quarter
of
2017
was primarily due to:
|
|
•
|
$76.9 million
of higher selling, general and administrative expenses ("SG&A"), primarily driven by the inclusion of the SG&A expenses of the Elizabeth Arden segment; and
|
|
|
•
|
a
$11.2 million
increase in interest expense incurred during the third quarter of 2017, primarily as a result of the debt-related transactions completed during 2016 in connection with financing the Elizabeth Arden Acquisition, as well as higher borrowings under the 2016 Revolving Credit Facility;
|
with the foregoing partially offset by:
|
|
•
|
a
$20.8 million
decrease in acquisition and integration costs related to the Elizabeth Arden Acquisition;
|
|
|
•
|
$16.9 million of losses from debt extinguishment that were recorded in the third quarter of 2016 as a result of debt transactions completed in connection with the Elizabeth Arden Acquisition; and
|
|
|
•
|
$14.8 million
of higher gross profit in the third quarter of 2017, primarily due to the inclusion of gross profit from the Elizabeth Arden segment, partially offset by lower gross profit within the Consumer and Professional segments.
|
Consolidated loss from continuing operations, net of taxes, in
the first nine months of 2017
was
$107.6 million
, compared to consolidated income from continuing operations of
$16.9 million
, net of taxes, in
the first nine months of 2016
. The
$124.5 million
decrease
in consolidated income from continuing operations, net of taxes, in
the first nine months of 2017
was primarily due to:
|
|
•
|
$282.5 million
of higher SG&A expenses, primarily driven by the inclusion of the SG&A expenses of the Elizabeth Arden segment; and
|
|
|
•
|
a
$41.0 million
increase in interest expense incurred during the first nine months of 2017, primarily as a result of the debt-related transactions completed during 2016 in connection with financing the Elizabeth Arden Acquisition, as well as higher borrowings under the 2016 Revolving Credit Facility;
|
with the foregoing partially offset by:
|
|
•
|
$119.0 million
of higher gross profit in
the first nine months of 2017
, primarily due to the inclusion of gross profit from the Elizabeth Arden segment, partially offset by lower gross profit within the Consumer and Professional segments;
|
|
|
•
|
a
$53.8 million
decrease in the provision for income taxes, primarily due to the pretax loss from continuing operations in
the first nine months of 2017
; and
|
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
|
|
•
|
$23.1 million of favorable variance in foreign currency gains, resulting from $16.8 million in foreign currency gains during the first nine months of 2017, as compared to $6.3 million of foreign currency losses during the first nine months of 2016.
|
These items are discussed in more detail within "Results of Operations" and within "Financial Condition, Liquidity and Capital Resources" below.
Operating Segments
The Company operates in four reporting segments: the consumer division (“Consumer”); Elizabeth Arden; the professional division (“Professional”); and Other:
|
|
•
|
The Consumer segment is comprised of the Company's consumer brands, which primarily include
Revlon
,
Almay
,
SinfulColors
and
Pure Ice
in color cosmetics;
Revlon ColorSilk
in women’s hair color;
Revlon
in beauty tools; and
Mitchum
in anti-perspirant deodorants. The Company’s principal customers for its consumer products include large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, the Internet/e-commerce, television shopping, department stores, one-stop shopping beauty retailers, specialty cosmetics stores and perfumeries in the U.S. and internationally. The Consumer segment also includes a skin care line under the
Natural Honey
brand and a hair color line under the
Llongueras
brand (licensed from a third party) sold to large volume retailers and other retailers, primarily in Spain, which were acquired as part of the Colomer Acquisition, as well as
Cutex
nail care products, which (combined with other
Cutex
businesses that the Company acquired in 1998) were acquired as part of the October 2015 and May 2016 acquisitions of the
Cutex
businesses and related assets in the U.S. (the "Cutex U.S. Acquisition") and in certain international territories (the "Cutex International Acquisition" and together with the Cutex U.S. Acquisition, the "Cutex Acquisitions"), respectively.
|
|
|
•
|
The Elizabeth Arden segment includes the operating results of the Elizabeth Arden business and related purchase accounting for the Company's September 2016 Elizabeth Arden Acquisition. Elizabeth Arden is a global prestige beauty products company with an iconic portfolio of prestige fragrance, skin care and cosmetic brands, which includes the
Elizabeth Arden
skin care brands, color cosmetics and fragrances; designer fragrances such as
Juicy Couture
,
John Varvatos
and
Wildfox Couture
;
and heritage fragrances such as
Curve
,
Elizabeth Taylor
,
Britney Spears
and
Christina Aguilera
.
|
|
|
•
|
The Professional segment is comprised primarily of the Company's professional brands, which include
Revlon Professional
in hair color, hair care and hair treatments;
CND
-
branded products
in nail polishes and nail enhancements; and
American Crew
in men’s grooming products, all of which are sold worldwide to professional salons. The Company’s principal customers for its professional products include hair and nail salons and distributors to professional salons in the U.S. and internationally. The Professional segment also includes a multi-cultural hair care line consisting of
Creme of Nature
hair care products sold to professional salons, large volume retailers and other retailers, primarily in the U.S.
|
|
|
•
|
The Other segment primarily includes the operating results related to the development, marketing and distribution of certain licensed fragrances and other beauty products. The results included within the Other segment are not material to the Company’s consolidated results of operations.
|
Results of Operations
Consolidated Net Sales:
Third
quarter results:
Consolidated net sales in the
third quarter
of
2017
were
$666.5 million
, a
$61.7 million
increase
, or
10.2%
, as compared to
$604.8 million
in the third quarter of 2016. Excluding the
$4.2 million
favorable
FX impact, consolidated net sales
increased
by
$57.5 million
, or
9.5%
, during the
third quarter
of
2017
. The XFX
increase
in the
third quarter
of
2017
was primarily driven by a
$112.9 million
increase in net sales as a result of the Elizabeth Arden Acquisition completed in September 2016; partially offset by a $
37.5 million
, or
10.9%
,
decrease
in Consumer segment net sales and a $
14.6 million
, or
12.3%
,
decrease
in Professional segment net sales.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Year-to-date results:
Consolidated net sales in
the first nine months of 2017
were
$1,907.1 million
, a
$373.8 million
increase
, or
24.4%
, as compared to
$1,533.3 million
in
the first nine months of 2016
. Excluding the
$3.8 million
unfavorable
FX impact, consolidated net sales
increased
by
$377.7 million
, or
24.6%
, during
the first nine months of 2017
. The XFX
increase
in
the first nine months of 2017
was primarily driven by a
$504.1 million
increase in net sales as a result of the Elizabeth Arden Acquisition completed in September 2016; partially offset by a
$86.9 million
, or
8.5%
,
decrease
in Consumer segment net sales and a
$36.9 million
, or
10.3%
,
decrease
in Professional segment net sales.
See "Segment Results" below for further discussion.
Segment Results:
The Company's management evaluates segment profit, which is defined as income from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses, for each of the Company's reportable segments. Segment profit also excludes unallocated corporate expenses and the impact of certain items that are not directly attributable to the segments' underlying operating performance, which includes the impact of: (i) restructuring and related charges; (ii) acquisition and integration costs; (iii) deferred compensation costs; (iv) charges related to the Elizabeth Arden 2016 Business Transformation Program; and (v) costs of sales resulting from a fair value adjustment to inventory acquired in the Elizabeth Arden Acquisition. Unallocated corporate expenses primarily include general and administrative expenses related to the corporate organization. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any material inter-segment sales. For a reconciliation of segment profit to income from continuing operations before income taxes, see Note 14, "Segment Data and Related Information," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
The following table provides a comparative summary of the Company's segment results for the
three months ended September 30, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Segment Profit
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
Consumer
|
$
|
306.7
|
|
|
$
|
342.8
|
|
|
$
|
(36.1
|
)
|
|
(10.5
|
)%
|
|
$
|
(37.5
|
)
|
|
(10.9
|
)%
|
|
$
|
33.0
|
|
|
$
|
81.0
|
|
|
$
|
(48.0
|
)
|
|
(59.3
|
)%
|
|
$
|
(48.0
|
)
|
|
(59.3
|
)%
|
Elizabeth Arden
(b)
|
248.1
|
|
|
135.2
|
|
|
112.9
|
|
|
83.5
|
%
|
|
112.9
|
|
|
83.5
|
%
|
|
31.6
|
|
|
32.5
|
|
|
(0.9
|
)
|
|
(2.8
|
)%
|
|
(0.9
|
)
|
|
(2.8
|
)%
|
Professional
|
107.0
|
|
|
118.8
|
|
|
(11.8
|
)
|
|
(9.9
|
)%
|
|
(14.6
|
)
|
|
(12.3
|
)%
|
|
18.9
|
|
|
23.7
|
|
|
(4.8
|
)
|
|
(20.3
|
)%
|
|
(5.1
|
)
|
|
(21.5
|
)%
|
Other
|
4.7
|
|
|
8.0
|
|
|
(3.3
|
)
|
|
(41.3
|
)%
|
|
(3.3
|
)
|
|
(41.3
|
)%
|
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(0.9
|
)
|
|
(900.0
|
)%
|
|
(0.9
|
)
|
|
(900.0
|
)%
|
Total
|
$
|
666.5
|
|
|
$
|
604.8
|
|
|
$
|
61.7
|
|
|
10.2
|
%
|
|
$
|
57.5
|
|
|
9.5
|
%
|
|
$
|
82.5
|
|
|
$
|
137.1
|
|
|
$
|
(54.6
|
)
|
|
(39.8
|
)%
|
|
$
|
(54.9
|
)
|
|
(40.0
|
)%
|
(a)
XFX excludes the impact of foreign currency fluctuations.
(b)
2016 Net Sales and Segment Profit represent results for the partial period of September 7, 2016 through September 30, 2016.
The following table provides a comparative summary of the Company's segment results for the
nine months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Segment Profit
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
Consumer
|
$
|
932.8
|
|
|
$
|
1,022.3
|
|
|
$
|
(89.5
|
)
|
|
(8.8
|
)%
|
|
$
|
(86.9
|
)
|
|
(8.5
|
)%
|
|
$
|
134.5
|
|
|
$
|
220.4
|
|
|
$
|
(85.9
|
)
|
|
(39.0
|
)%
|
|
$
|
(85.3
|
)
|
|
(38.7
|
)%
|
Elizabeth Arden
(b)
|
639.3
|
|
|
135.2
|
|
|
504.1
|
|
|
372.9
|
%
|
|
504.1
|
|
|
372.9
|
%
|
|
65.5
|
|
|
32.5
|
|
|
33.0
|
|
|
101.5
|
%
|
|
33.0
|
|
|
101.5
|
%
|
Professional
|
320.4
|
|
|
357.2
|
|
|
(36.8
|
)
|
|
(10.3
|
)%
|
|
(36.9
|
)
|
|
(10.3
|
)%
|
|
44.5
|
|
|
73.4
|
|
|
(28.9
|
)
|
|
(39.4
|
)%
|
|
(29.4
|
)
|
|
(40.1
|
)%
|
Other
|
14.6
|
|
|
18.6
|
|
|
(4.0
|
)
|
|
(21.5
|
)%
|
|
(2.6
|
)
|
|
(14.0
|
)%
|
|
(2.5
|
)
|
|
(0.9
|
)
|
|
(1.6
|
)
|
|
(177.8
|
)%
|
|
(1.9
|
)
|
|
(211.1
|
)%
|
Total
|
$
|
1,907.1
|
|
|
$
|
1,533.3
|
|
|
$
|
373.8
|
|
|
24.4
|
%
|
|
$
|
377.7
|
|
|
24.6
|
%
|
|
$
|
242.0
|
|
|
$
|
325.4
|
|
|
$
|
(83.4
|
)
|
|
(25.6
|
)%
|
|
$
|
(83.6
|
)
|
|
(25.7
|
)%
|
(a)
XFX excludes the impact of foreign currency fluctuations.
(b)
2016 Net Sales and Segment Profit represent results for the partial period of September 7, 2016 through September 30, 2016.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Consumer Segment
Third
quarter results:
Consumer segment net sales in the
third quarter
of
2017
were
$306.7 million
, a
$36.1 million
or
10.5%
decrease
, compared to
$342.8 million
in
the third quarter of 2016
. Excluding the
$1.4 million
favorable
FX impact, total Consumer net sales in the
third quarter
of
2017
decreased
by
$37.5 million
, or
10.9%
, compared to
the third quarter of 2016
. This
decrease
was primarily driven by continuing consumption declines in core beauty categories in the mass retail channel in North America, inventory de-stocking by certain retail customers and higher sales returns and incentives, which had a negative impact on net sales of
Revlon
color cosmetics,
Almay
color cosmetics and
SinfulColors
color cosmetics, partially offset by strong sales growth internationally for
Revlon
color cosmetics.
Consumer segment profit in the
third quarter
of
2017
was
$33.0 million
, a
$48.0 million
, or
59.3%
,
decrease
, as compared to
$81.0 million
in
the third quarter of 2016
. This
decrease
was primarily driven by lower gross profit as a result of the net sales declines in North America, higher sales returns and incentives, as well as higher brand support.
Year-to-date results:
Consumer segment net sales in
the first nine months of 2017
were
$932.8 million
, a
$89.5 million
or
8.8%
decrease
, compared to
$1,022.3 million
in
the first nine months of 2016
. Excluding the
$2.6 million
unfavorable
FX impact, total Consumer net sales in
the first nine months of 2017
decreased
by
$86.9 million
, or
8.5%
, compared to
the first nine months of 2016
. This
decrease
was primarily driven by continuing consumption declines in core beauty categories in the mass retail channel in North America, which had a negative impact on net sales of
Revlon
color cosmetics,
Almay
color cosmetics and
SinfulColors
color cosmetics, as well as higher sales returns and incentives. These net sales decreases were partially offset by continued net sales growth internationally for
Revlon
color cosmetics.
Consumer segment profit in
the first nine months of 2017
was
$134.5 million
, a
$85.9 million
, or
39.0%
,
decrease
, as compared to
$220.4 million
in
the first nine months of 2016
. Excluding the
$0.6 million
unfavorable
FX impact, Consumer segment profit in
the first nine months of 2017
decreased
by
$85.3 million
, or
38.7%
, compared to
the first nine months of 2016
. This
decrease
was primarily driven by lower gross profit as a result of the net sales declines in North America and higher sales returns and incentives, partially offset by lower brand support expenses.
Elizabeth Arden Segment
Third quarter and Year-to-date results:
The Elizabeth Arden segment is comprised of the operations that the Company acquired in the Elizabeth Arden Acquisition, which closed on September 7, 2016. As such, the results for the three and nine months ended September 30, 2016 reflect only amounts for the partial period of September 7, 2016 through September 30, 2016. Therefore, an analysis of net sales and segment profit for the Elizabeth Arden segment for the three and nine months ended September 30, 2017 is not included in this Form 10-Q, as the Company does not have full comparable prior period net sales or segment profit for the Elizabeth Arden segment.
Professional Segment
Third
quarter results:
Professional segment net sales in the
third quarter
of
2017
were
$107.0 million
, a
$11.8 million
or
9.9%
decrease
, as compared to
$118.8 million
in
the third quarter of 2016
. Excluding the
$2.8 million
favorable
FX impact, total Professional segment net sales in the
third quarter
of
2017
decreased
by
$14.6 million
, or
12.3%
, as compared to
the third quarter of 2016
. This
decrease
was driven primarily by continued net sales declines of
CND
nail products, as well as
American Crew
men's grooming products, as the Company continues its efforts to manage trade inventory for the
American Crew
brand.
Professional segment profit in the
third quarter
of
2017
was
$18.9 million
, a
$4.8 million
or
20.3%
decrease
, as compared to
$23.7 million
in
the third quarter of 2016
. This decrease was primarily driven by lower gross profit as a result of declines in net sales, partially offset by lower brand support expenses.
Year-to-date results:
Professional segment net sales in
the first nine months of 2017
were
$320.4 million
, a
$36.8 million
or
10.3%
decrease
, as compared to
$357.2 million
in
the first nine months of 2016
. Excluding the
$0.1 million
favorable
FX impact, total Professional segment net sales in
the first nine months of 2017
decreased
by
$36.9 million
, or
10.3%
, as compared to
the first nine months of
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
2016
. This
decrease
was driven primarily by lower net sales of
CND
nail products and
American Crew
men's grooming products, partially offset by higher net sales of
Revlon Professional
hair products.
Professional segment profit in
the first nine months of 2017
was
$44.5 million
, a
$28.9 million
or
39.4%
decrease
, as compared to
$73.4 million
in
the first nine months of 2016
, primarily driven by the lower net sales, partially offset by lower brand support expenses.
Geographic Results:
The following tables provide a comparative summary of the Company's net sales by region for the
three months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
157.5
|
|
|
$
|
210.8
|
|
|
$
|
(53.3
|
)
|
|
(25.3
|
)%
|
|
$
|
(53.8
|
)
|
|
(25.5
|
)%
|
International
|
149.2
|
|
|
132.0
|
|
|
17.2
|
|
|
13.0
|
%
|
|
16.3
|
|
|
12.3
|
%
|
Elizabeth Arden
(c)
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
143.6
|
|
|
$
|
87.6
|
|
|
$
|
56.0
|
|
|
63.9
|
%
|
|
$
|
56.0
|
|
|
63.9
|
%
|
International
|
104.5
|
|
|
47.6
|
|
|
56.9
|
|
|
119.5
|
%
|
|
56.9
|
|
|
119.5
|
%
|
Professional
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
42.1
|
|
|
$
|
56.1
|
|
|
$
|
(14.0
|
)
|
|
(25.0
|
)%
|
|
$
|
(14.2
|
)
|
|
(25.3
|
)%
|
International
|
64.9
|
|
|
62.7
|
|
|
2.2
|
|
|
3.5
|
%
|
|
(0.4
|
)
|
|
(0.6
|
)%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
N.M.
|
|
(b)
|
$
|
—
|
|
|
N.M.
|
|
International
|
4.7
|
|
|
8.0
|
|
|
(3.3
|
)
|
|
(41.3
|
)%
|
|
(3.3
|
)
|
|
(41.3
|
)%
|
Total Net Sales
|
$
|
666.5
|
|
|
$
|
604.8
|
|
|
$
|
61.7
|
|
|
10.2
|
%
|
|
$
|
57.5
|
|
|
9.5
|
%
|
(a)
XFX excludes the impact of foreign currency fluctuations.
(b)
N.M. - Not meaningful
(c)
2016 Net Sales and Segment Profit represent results for the partial period of September 7, 2016 through September 30, 2016.
The following tables provide a comparative summary of the Company's net sales by region for the
nine months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
534.8
|
|
|
$
|
656.7
|
|
|
$
|
(121.9
|
)
|
|
(18.6
|
)%
|
|
$
|
(122.2
|
)
|
|
(18.6
|
)%
|
International
|
398.0
|
|
|
365.6
|
|
|
32.4
|
|
|
8.9
|
%
|
|
35.3
|
|
|
9.7
|
%
|
Elizabeth Arden
(c)
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
339.4
|
|
|
$
|
87.6
|
|
|
$
|
251.8
|
|
|
287.4
|
%
|
|
$
|
251.8
|
|
|
287.4
|
%
|
International
|
299.9
|
|
|
47.6
|
|
|
252.3
|
|
|
530.0
|
%
|
|
252.3
|
|
|
530.0
|
%
|
Professional
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
129.4
|
|
|
$
|
167.0
|
|
|
$
|
(37.6
|
)
|
|
(22.5
|
)%
|
|
$
|
(37.6
|
)
|
|
(22.5
|
)%
|
International
|
191.0
|
|
|
190.2
|
|
|
0.8
|
|
|
0.4
|
%
|
|
0.7
|
|
|
0.4
|
%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
N.M.
|
|
(b)
|
$
|
—
|
|
|
N.M.
|
|
International
|
14.6
|
|
|
18.6
|
|
|
(4.0
|
)
|
|
(21.5
|
)%
|
|
(2.6
|
)
|
|
(14.0
|
)%
|
Total Net Sales
|
$
|
1,907.1
|
|
|
$
|
1,533.3
|
|
|
$
|
373.8
|
|
|
24.4
|
%
|
|
$
|
377.7
|
|
|
24.6
|
%
|
(a)
XFX excludes the impact of foreign currency fluctuations.
(b)
N.M. - Not meaningful
(c)
2016 Net Sales and Segment Profit represent results for the partial period of September 7, 2016 through September 30, 2016.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Consumer Segment
Third
quarter results:
North America
In North America, Consumer segment net sales in the
third quarter
of
2017
decreased
by
$53.3 million
, or
25.3%
, to
$157.5 million
, as compared to
$210.8 million
in
the third quarter of 2016
. Excluding the
$0.5 million
favorable
FX impact, Consumer segment net sales in North America in the
third quarter
of
2017
decreased
by
$53.8 million
, or
25.5%
, as compared to
the third quarter of 2016
. This
decrease
was primarily due to declines in the U.S. mass retail channel driven by continuing declines in consumption across several beauty categories, as well as higher sales returns and incentives, all of which resulted in declines in net sales of
Revlon
color cosmetics and
Almay
color cosmetics.
International
Internationally, Consumer segment net sales in the
third quarter
of
2017
increased
by
$17.2 million
, or
13.0%
, to
$149.2 million
, as compared to
$132.0 million
in
the third quarter of 2016
. Excluding the
$0.9 million
favorable
FX impact, Consumer segment International net sales in the
third quarter
of
2017
increased
by
$16.3 million
, or
12.3%
, as compared to
the third quarter of 2016
. This
increase
was driven primarily by higher net sales of
Revlon
color cosmetics and
Mitchum
anti-perspirant deodorant products. From a geographic perspective, the increase in International net sales was mainly driven by increased net sales in certain distributor territories, as well as Japan, Hong Kong and Australia.
Year-to-date results:
North America
In North America, Consumer segment net sales in
the first nine months of 2017
decreased
by
$121.9 million
, or
18.6%
, to
$534.8 million
, as compared to
$656.7 million
in
the first nine months of 2016
. Excluding the
$0.3 million
favorable
FX impact, Consumer segment net sales in North America in
the first nine months of 2017
decreased
by
$122.2 million
, or
18.6%
, as compared to
the first nine months of 2016
. This
decrease
was primarily due to declines in the U.S. mass retail channel driven by declines in consumption across several beauty categories. The net sales of
Revlon
color cosmetics,
Almay
color cosmetics and
SinfulColors
color cosmetics all declined in
the first nine months of 2017
compared to
the first nine months of 2016
.
International
Internationally, Consumer segment net sales in
the first nine months of 2017
increased
by
$32.4 million
, or
8.9%
, to
$398.0 million
, as compared to
$365.6 million
in
the first nine months of 2016
. Excluding the
$2.9 million
unfavorable
FX impact, Consumer segment International net sales in
the first nine months of 2017
increased
by
$35.3 million
, or
9.7%
, as compared to
the first nine months of 2016
. This
increase
was driven by higher net sales of
Revlon
color cosmetics,
Mitchum
anti-perspirant deodorant products and
Cutex
nail care products. From a geographic perspective, the increase in International net sales was mainly driven by increased net sales in certain distributor territories, as well as Japan, Hong Kong and Australia.
Elizabeth Arden Segment
Third quarter and Year-to-date results:
The Elizabeth Arden segment is comprised of the operations that the Company acquired in the Elizabeth Arden Acquisition, which closed on September 7, 2016. As such, the results for the three and nine months ended September 30, 2016 reflect only amounts for the partial period of September 7, 2016 through September 30, 2016. Therefore, an analysis of net sales and segment profit for the Elizabeth Arden segment for the three and nine months ended September 30, 2017 is not included in this Form 10-Q, as the Company does not have full comparable prior period net sales or segment profit for the Elizabeth Arden segment.
Professional Segment
Third
quarter results:
North America
In North America, Professional segment net sales in the
third quarter
of
2017
decreased
by
$14.0 million
, or
25.0%
, to
$42.1 million
, as compared to
$56.1 million
in
the third quarter of 2016
. Excluding the
$0.2 million
favorable
FX impact, Professional segment net sales in North America in the
third quarter
of
2017
decreased
by
$14.2 million
, or
25.3%
, as compared to
the third quarter of 2016
. This
decrease
was primarily driven by declines in net sales of
CND
nail products, as well as
American Crew
men's grooming products, as the Company continues its efforts to manage trade inventory for the
American Crew
brand.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
International
Internationally, Professional segment net sales in the
third quarter
of
2017
increased
by
$2.2 million
, or
3.5%
, to
$64.9 million
, as compared to
$62.7 million
in
the third quarter of 2016
. Excluding the
$2.6 million
favorable
FX impact, Professional segment International net sales were essentially flat.
Year-to-date results:
North America
In North America, Professional segment net sales in
the first nine months of 2017
decreased
by
$37.6 million
, or
22.5%
, to
$129.4 million
, as compared to
$167.0 million
in
the first nine months of 2016
. This
decrease
was primarily driven by declines in net sales of
CND
nail products and
American Crew
men's grooming products.
International
Internationally, Professional segment net sales in
the first nine months of 2017
increased
by
$0.8 million
, or
0.4%
, to
$191.0 million
, as compared to
$190.2 million
in
the first nine months of 2016
. Excluding the
$0.1 million
favorable
FX impact, Professional segment International net sales
increased
by
$0.7 million
, or
0.4%
, in
the first nine months of 2017
, as compared to
the first nine months of 2016
, as increases in net sales of
Revlon Professional
hair products and
American Crew
men's grooming products, were mostly offset by lower net sales of
CND
nail products. From a geographic perspective, the increase in International net sales was mainly driven by increased net sales in Russia, Italy and France.
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Gross profit
|
$
|
376.2
|
|
|
$
|
361.4
|
|
|
$
|
14.8
|
|
|
$
|
1,083.5
|
|
|
$
|
964.5
|
|
|
$
|
119.0
|
|
Percentage of net sales
|
56.4
|
%
|
|
59.8
|
%
|
|
(3.4
|
)%
|
|
56.8
|
%
|
|
62.9
|
%
|
|
(6.1
|
)%
|
Gross profit
increased
by
$14.8 million
in the
third quarter
of
2017
, as compared to
the third quarter of 2016
. Gross profit
decreased
as a percentage of net sales in the
third quarter
of
2017
by
3.4
percentage points, as compared to
the third quarter of 2016
. The drivers of the
decrease
in gross profit as a percentage of net sales in the
third quarter
of
2017
, as compared to
the third quarter of 2016
, primarily included:
|
|
•
|
the inclusion of gross profit from the Elizabeth Arden Acquisition, which decreased gross profit by 3.0 percentage points;
|
|
|
•
|
unfavorable product mix, which decreased gross profit by 0.2 percentage points; and
|
|
|
•
|
higher sales returns reserves, which decreased gross profit by 0.1 percentage points.
|
Unfavorable volume decreased gross profit by $26 million, with no impact on gross profit as a percentage of net sales.
Gross profit
increased
by
$119.0 million
in
the first nine months of
2017
, as compared to
the first nine months of
2016
. Gross profit
decreased
as a percentage of net sales in
the first nine months of
2017
by
6.1
percentage points, as compared to
the first nine months of
2016
. The drivers of the
decrease
in gross profit as a percentage of net sales in
the first nine months of
2017
, as compared to
the first nine months of
2016
, primarily included:
|
|
•
|
the inclusion of gross profit from the Elizabeth Arden Acquisition, which decreased gross profit by 3.8 percentage points;
|
|
|
•
|
higher sales allowances, which decreased gross profit by 1.3 percentage points;
|
|
|
•
|
unfavorable product mix, which decreased gross profit by 0.6 percentage points;
|
|
|
•
|
additional inventory costs as a result of the recognition of an increase in the fair value of inventory acquired in the Elizabeth Arden Acquisition, which reduced gross profit by 0.2 percentage points; and
|
|
|
•
|
the unfavorable impact of less overhead absorption during the
third quarter
of
2017
, which decreased gross profit by 0.1 percentage points.
|
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Unfavorable volume decreased gross profit by $64 million, with no impact on gross profit as a percentage of net sales.
SG&A expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
SG&A expenses
|
$
|
362.6
|
|
|
$
|
285.7
|
|
|
$
|
76.9
|
|
|
$
|
1,075.3
|
|
|
$
|
792.8
|
|
|
$
|
282.5
|
|
SG&A expenses increased by
$76.9 million
in the
third quarter
of
2017
, as compared to
the third quarter of 2016
, primarily driven by:
|
|
•
|
the inclusion of SG&A expenses in the Elizabeth Arden segment as a result of the Elizabeth Arden Acquisition, which contributed $84.6 million to the increase in SG&A expenses;
|
with the foregoing partially offset by:
|
|
•
|
lower general and administrative expenses of $12.5 million, primarily due to lower incentive compensation expense.
|
SG&A expenses increased by
$282.5 million
in
the first nine months of
2017
, as compared to
the first nine months of
2016
, primarily driven by:
|
|
•
|
the inclusion of SG&A expenses in the Elizabeth Arden segment as a result of the Elizabeth Arden Acquisition, which contributed
$308.5 million
to the increase in SG&A expenses;
|
with the foregoing partially offset by:
|
|
•
|
a $18.4 million decrease in brand support expenses, primarily within the Consumer segment, due to the decline in net sales; and
|
|
|
•
|
lower general and administrative expenses of $8.1 million, primarily due to lower incentive compensation expense.
|
Acquisition and Integration Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Acquisition Costs
|
$
|
0.8
|
|
|
$
|
13.4
|
|
|
$
|
(12.6
|
)
|
|
$
|
2.8
|
|
|
$
|
19.4
|
|
|
$
|
(16.6
|
)
|
Integration Costs
|
11.9
|
|
|
20.1
|
|
|
(8.2
|
)
|
|
37.4
|
|
|
20.1
|
|
|
17.3
|
|
Total acquisition and integration costs
|
$
|
12.7
|
|
|
$
|
33.5
|
|
|
$
|
(20.8
|
)
|
|
$
|
40.2
|
|
|
$
|
39.5
|
|
|
$
|
0.7
|
|
The Company incurred
$12.7 million
of acquisition and integration costs in the
third quarter
of
2017
, consisting primarily of
$0.8 million
of acquisition costs and
$11.8 million
of integration costs related to the integration of Elizabeth Arden. The acquisition costs primarily included legal fees directly attributable to the Elizabeth Arden Acquisition. The integration costs consisted of non-restructuring costs related primarily to the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees, lease termination costs and employee related costs.
The Company incurred $33.5 million of acquisition and integration costs in the third quarter of 2016, primarily related to the Elizabeth Arden Acquisition.
The Company incurred
$40.2 million
of acquisition and integration costs in
the first nine months of
2017
, consisting primarily of
$0.8 million
of acquisition costs and
$37.3 million
of integration costs related to the integration of Elizabeth Arden. The acquisition costs primarily included legal fees directly attributable to the Elizabeth Arden Acquisition. The integration costs consisted of non-restructuring costs related primarily to the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees, lease termination costs and employee related costs.
The Company incurred $39.5 million of acquisition and integration costs in the first nine months of 2016, primarily related
to the Elizabeth Arden Acquisition.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Restructuring charges and other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Restructuring charges and other, net
|
$
|
6.4
|
|
|
$
|
0.5
|
|
|
$
|
5.9
|
|
|
$
|
11.3
|
|
|
$
|
2.3
|
|
|
$
|
9.0
|
|
EA Integration Restructuring Program
During the
third quarter
of
2017
, the Company recorded charges totaling $
9.9 million
related to restructuring and related actions under the EA Integration Restructuring Program. Of this $
9.9 million
: (a) charges of $
9.3 million
were recorded in restructuring charges and included lease termination costs of approximately
$3.9 million
; (b) charges of
0.3 million
were recorded in SG&A expenses; and (c) charges of
$0.3 million
were recorded in cost of sales.
During
the first nine months of
2017, the Company recorded charges totaling
$15.6 million
related to restructuring and related actions under the EA Integration Restructuring Program. Of this
$15.6 million
: (a) charges of
$14.1 million
were recorded in restructuring charges and included lease termination costs of approximately
$3.9 million
; (b) charges of
$1.0 million
were recorded in SG&A expenses; and (c) charges of
$0.5 million
were recorded in cost of sales.
The Company expects approximately $55 million to $60 million of synergies and cost reductions to benefit 2017 from the EA Integration Restructuring Program and annualized synergies and cost reductions of approximately $190 million to be achieved over a multi-year period. During the three and nine months ended
September 30, 2017
, the Company realized approximately $18.0 million and $42.0 million, respectively, of these synergies and cost-reductions, which primarily benefited the Elizabeth Arden segment results and reduced the Company’s corporate-level SG&A expenses.
2015 Efficiency Program
During the third quarter of 2017, the Company performed a review of the 2015 Efficiency Program and determined that employees in certain positions that were initially identified to be eliminated would continue to be employed by the Company in varying positions in connection with integrating the Elizabeth Arden and Revlon organizations. As a result, the Company reversed approximately
$3.2 million
in previously accrued restructuring charges recognized in connection with the 2015 Efficiency Program.
During the three and nine months ended September 30, 2016, the Company recognized $
0.5 million
and $
2.3 million
, respectively, of restructuring charges and other, net, in connection with the 2015 Efficiency Program.
See Note 3, "Restructuring Charges," to the Unaudited Consolidated Financial Statements in this Form 10-Q for further discussion.
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Interest expense
|
$
|
38.6
|
|
|
$
|
27.4
|
|
|
$
|
11.2
|
|
|
$
|
110.3
|
|
|
$
|
69.3
|
|
|
$
|
41.0
|
|
The
$11.2 million
increase in interest expense in the
third quarter
of
2017
, as compared to
the third quarter of 2016
, and the
$41.0 million
increase in interest expense in
the first nine months of
2017
, as compared to
the first nine months of
2016
, were primarily due to higher average debt outstanding and higher weighted average borrowing rates as a result of the debt transactions completed in connection with the Elizabeth Arden Acquisition and the complete refinancing and repayment of Products Corporation’s then-existing 2011 term loan (the "2011 Term Loan") and 2013 term loan (the "Old Acquisition Term Loan" and together with the 2011 Term Loan, the "Old Term Loan Facility") that was incurred in connection with completing the October 2013 acquisition of The Colomer Group Participations, S.L. (the "Colomer Acquisition”), as well as
$178.5 million
of higher borrowings under the 2016 Revolving Credit Facility.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Foreign currency (gains) losses, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
Foreign currency (gains) losses, net
|
$
|
(3.1
|
)
|
|
$
|
1.2
|
|
|
$
|
(4.3
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
6.3
|
|
|
$
|
(23.1
|
)
|
The
$4.3 million
increase in foreign currency gains, net, during the
third quarter
of
2017
, as compared to
the third quarter of 2016
, was primarily driven by the net favorable impact of the revaluation of certain U.S. Dollar intercompany payables and foreign currency denominated receivables, partly offset by unrealized losses on derivative financial instruments.
The
$23.1 million
increase in foreign currency gains, net, during
the first nine months of
2017
, as compared to
the first nine months of
2016
, was primarily driven by the net favorable impact of the revaluation of certain U.S. Dollar intercompany payables and foreign currency receivables, partly offset by unrealized losses on derivative financial instruments.
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
(Benefit from) provision for income taxes
|
$
|
(10.8
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(10.4
|
)
|
|
$
|
(37.8
|
)
|
|
$
|
16.0
|
|
|
$
|
(53.8
|
)
|
The Company's benefit from income taxes increased by
$10.4 million
in the
third quarter
of
2017
, as compared to
the third quarter of 2016
, primarily due to the pre-tax loss from continuing operations in the third quarter of 2017.
The Company's provision for income taxes decreased by
$53.8 million
in
the first nine months of
2017
, as compared to
the first nine months of
2016
, primarily due to the pre-tax loss from continuing operations in the first nine months of 2017.
The Company's effective tax rate for the three months ended September 30,
2017
was lower than the
35%
federal statutory rate as a result of the level and mix of earnings between jurisdictions, foreign dividends and earnings taxable in the U.S., partially offset by the effect of certain favorable discrete items.
The Company's effective tax rate for the nine months ended September 30,
2017
was lower than the
35%
federal statutory rate as a result of the level and mix of earnings between jurisdictions, foreign dividends and earnings taxable in the U.S. and state and local taxes, partially offset by the effect of certain favorable discrete items.
The Company expects that its tax provision and effective tax rate in any individual quarter and year-to-date period will vary and may not be indicative of the Company's tax provision and effective tax rate for the full year.
Financial Condition, Liquidity and Capital Resources
At
September 30, 2017
, the Company had a liquidity position of
$204.6 million
, consisting of $79.0 million of unrestricted cash and cash equivalents, as well as
$125.6 million
in available borrowings under Products Corporation's $400.0 million 2016 Revolving Credit Facility, based upon the borrowing base of
$400.0 million
, less
$10.0 million
of outstanding undrawn letters of credit,
$20.5 million
of outstanding checks and
$243.9 million
of borrowings outstanding under the 2016 Revolving Credit Facility at such date.
The Company’s foreign operations held
$75.4 million
out of the total
$79.2 million
in cash and cash equivalents (net of any outstanding checks) as of
September 30, 2017
. The cash held by the Company’s foreign operations is primarily used to fund such operations. The Company regularly assesses its cash needs and the available sources of cash to fund these needs. As part of this assessment, the Company determines the amount of foreign earnings, if any, that it intends to repatriate to help fund its domestic cash needs, including for the Company’s debt service obligations, and pays applicable U.S. income and foreign withholding taxes, if any, on such earnings to the extent repatriated, and otherwise records a tax liability for the estimated cost of repatriation in a future period. During 2017, the Company repatriated funds to the U.S. through the settlement of historical loans and payables due from certain foreign subsidiaries. The Company believes that the cash generated by its domestic operations, availability under the 2016 Revolving Credit Facility and other permitted lines of credit, as well as the option to further settle intercompany loans and payables with certain foreign subsidiaries, should be sufficient to meet its domestic liquidity needs for at least the next 12 months. Therefore, the Company currently anticipates that restrictions and/or taxes on repatriation of foreign earnings will not have a material effect on the Company’s liquidity during such period.
Changes in Cash Flows
At
September 30, 2017
, the Company had cash and cash equivalents of
$79.2 million
, compared with
$186.8 million
at
December 31, 2016
. The following table summarizes the Company’s cash flows from operating, investing and financing activities for the
nine months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
Net cash used in operating activities
|
$
|
(274.2
|
)
|
|
$
|
(68.2
|
)
|
Net cash used in investing activities
|
(69.5
|
)
|
|
(1,061.3
|
)
|
Net cash provided by financing activities
|
226.7
|
|
|
898.2
|
|
Effect of exchange rate changes on cash and cash equivalents
|
9.4
|
|
|
3.6
|
|
Operating Activities
Net cash used in operating activities was
$274.2 million
and $
68.2 million
for the first nine months of
2017
and
2016
, respectively. The increase in cash used in the first nine months of
2017
, compared to the first nine months of 2016, was primarily driven by higher inventory balances; higher interest payments as a result of increased debt incurred in the third quarter of 2016 in connection with financing and consummating the Elizabeth Arden Acquisition, as well as higher borrowings under the 2016 Revolving Credit Facility; higher payments for restructuring, acquisition and integration costs in connection with the EA Integration Restructuring Program during the first nine months of 2017; and higher purchases of permanent displays and capital expenditures, partially offset by
favorable changes in working capital
.
Investing Activities
Net cash used in investing activities was
$69.5 million
and $
1,061.3 million
for the first nine months of
2017
and
2016
, respectively, which included
$69.5 million
and
$33.1 million
of cash used for capital expenditures, respectively. Capital expenditures in
the first nine months of
2017
included approximately
$22 million
for Elizabeth Arden integration-related investments.
Financing Activities
Net cash provided by financing activities was
$226.7 million
and
$898.2 million
for the first nine months of
2017
and
2016
, respectively.
Net cash provided by financing activities for the first nine months of
2017
primarily included:
|
|
•
|
$243.9 million
of borrowings under the 2016 Revolving Credit Facility;
|
with the foregoing partially offset by:
|
|
•
|
$13.5 million
of repayments under the 2016 Term Loan Facility.
|
Net cash used in financing activities for the first nine months of
2016
primarily included:
|
|
•
|
cash proceeds received in connection with originating the 2016 Term Loan Facility, in the aggregate principal amount of $1,800.0 million, or $1,791.0 million, net of discounts;
|
|
|
•
|
cash proceeds received in connection with issuance of the 6.25% Senior Notes, in the aggregate principal amount of $450.0 million; and
|
|
|
•
|
borrowings under the 2016 Revolving Credit Facility of $65.4 million;
|
with the foregoing partially offset by:
|
|
•
|
$658.6 million of cash used to repay all of the aggregate principal balance outstanding under Products Corporation’s 2011 Term Loan;
|
|
|
•
|
$651.4 million of cash used to repay all of the aggregate principal balance outstanding under Products Corporation’s Old Acquisition Term Loan;
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(i) $45.0 million of fees incurred in connection with originating the 2016 Term Loan Facility; (ii) $5.7 million of fees incurred in connection with originating the 2016 Revolving Credit Facility; and (iii) $10.9 million of fees incurred in connection with issuing Products Corporation's 6.25% Senior Notes;
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a $23.2 million required excess cash flow prepayment made under the Old Term Loan Facility, as discussed below;
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$3.4 million of scheduled amortization payments on the Old Acquisition Term Loan;
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$2.7 million utilized for the repurchase of shares from a former executive; and
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a $2.6 million decrease in short-term borrowings and overdraft.
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Long-Term Debt Instruments
For further detail regarding Products Corporation's long-term debt instruments, see Note 11, "Long-Term Debt," to the Consolidated Financial Statements in Revlon's Annual Report on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 3, 2017 (the "2016 Form 10-K"), as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" in Revlon's 2016 Form 10-K.
Covenants
Products Corporation was in compliance with all applicable covenants under the 2016 Credit Facilities as of
September 30, 2017
. At
September 30, 2017
, the aggregate principal amounts outstanding under the 2016 Term Loan Facility and the 2016 Revolving Credit Facility were
$1,782.0 million
and
$243.9 million
, respectively. Availability under the
$400.0 million
2016 Revolving Credit Facility as of
September 30, 2017
, based upon the calculated borrowing base of
$400.0 million
, less
$10.0 million
of outstanding undrawn letters of credit,
$20.5 million
of outstanding checks and
$243.9 million
then drawn on the 2016 Revolving Credit Facility, was
$125.6 million
.
Products Corporation was in compliance with all applicable covenants under its Senior Notes Indentures as of
September 30, 2017
.
Sources and Uses
The Company’s principal sources of funds are expected to be operating revenues, cash on hand and funds available for borrowing under the 2016 Revolving Credit Facility and other permitted lines of credit. The 2016 Credit Agreements and the Senior Notes Indentures contain certain provisions that by their terms limit Products Corporation's and its subsidiaries’ ability to, among other things, incur additional debt.
The Company’s principal uses of funds are expected to be the payment of operating expenses, including expenses in connection with the continued execution of the Company’s business strategy; payments in connection with the Company's synergy and integration programs related to the Elizabeth Arden Acquisition (including, without limitation, for the EA Integration Restructuring Program); purchases of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement benefit plan contributions; payments in connection with the Company’s restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; severance not otherwise included in the Company’s restructuring programs; debt and/or equity repurchases, if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade. The Company’s cash contributions to its pension and post-retirement benefit plans in the first nine months of
2017
were
$5.8 million
. The Company expects cash contributions to its pension and post-retirement benefit plans to be approximately
$10 million
in the aggregate for 2017. The Company’s cash taxes paid, net of refunds, in the first nine months of
2017
were
$11.1 million
. The Company expects to pay cash taxes of approximately
$10 million
to
$15 million
in the aggregate during 2017. The Company’s purchases of permanent wall displays and capital expenditures in the first nine months of
2017
were
$37.3 million
and
$69.5 million
, respectively. The Company expects purchases of permanent wall displays to be approximately
$65 million
to
$75 million
during 2017 and expects capital expenditures to be approximately
$100 million
to
$120 million
in 2017. Capital expenditures for 2017 include approximately $50 million of expected spend for the EA Integration Restructuring Program,
$22 million
of which were incurred through September 30, 2017.
As a result of the EA Integration Restructuring Program, as well as other actions that the Company is continuing to evaluate related to integrating the Elizabeth Arden organization into the Company’s business, such as through the elimination of duplicative functions, leveraging purchasing scale and optimizing the manufacturing and distribution networks of the combined company, the Company currently expects to realize over a multi-year period annualized synergies and cost reductions of approximately $190 million, with approximately $55 million to $60 million of synergies and cost reductions from the EA Integration Restructuring Program expected to benefit 2017. In order to capture these annualized cost reductions, the Company anticipates that it will incur, over a multi-year period, approximately $100 million to $110 million of additional integration-related capital expenditures and approximately $70 million to $80 million of non-restructuring integration costs. Any of these actions, the intended purpose of which would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities. Any such activities may be funded with cash on hand, funds available under the 2016 Revolving Credit Facility and/or other permitted additional sources of capital, which actions could increase the Company’s total debt.
The Company has undertaken, and continues to assess, refine and implement, a number of programs to efficiently manage its working capital, including, among other things, initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of trade receivables and accounts payable; and controls on general and administrative spending. In the ordinary course of business, the Company’s source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows.
Continuing to execute the Company’s business strategy could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands (including, without limitation, through licensing transactions), divesting or discontinuing non-core business lines (which may include exiting certain territories), further refining the Company’s approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure, including optimizing the Colomer Acquisition, the Cutex Acquisitions and/or the Elizabeth Arden Acquisition. Any of these actions, the intended purpose of which would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities. Any such activities may be funded with cash on hand, funds available under the 2016 Revolving Credit Facility and/or other permitted additional sources of capital, which actions could increase the Company’s total debt.
The Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any such retirement or purchase of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
The Company expects that operating revenues, cash on hand and funds available for borrowing under the 2016 Revolving Credit Facility and other permitted lines of credit will be sufficient to enable the Company to pay its operating expenses for 2017, including expenses in connection with executing the Company’s business strategy, payments in connection with the Company's synergy and integration programs related to the Elizabeth Arden Acquisition, purchases of permanent wall displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, severance not otherwise included in the Company’s restructuring programs, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade.
There can be no assurance that available funds will be sufficient to meet the Company’s cash requirements on a consolidated basis, as among other things, the Company’s liquidity can be impacted by a number of factors, including its level of sales, costs and expenditures. If the Company’s anticipated level of revenues is not achieved because of, among other things, decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty care products in one or more of the Company's segments; adverse changes in foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors and/or decreased performance by third party suppliers; changes in consumer purchasing habits, including with respect to retailer preferences and/or sales channels, such as due to the continuing consumption declines in core beauty categories in the mass retail channel in North America, which continues to have a negative impact on net sales of
Revlon
color cosmetics,
Almay
color cosmetics,
SinfulColors
color cosmetics and
Mitchum
anti-perspirant deodorant products; inventory management and/or de-stocking by the Company's customers; space reconfigurations or reductions in display space by the Company's customers; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; or less than anticipated results from the Company’s existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company’s expenses, including, without limitation, for synergy and integration programs related to the Elizabeth Arden Acquisition, capital expenditures, restructuring and severance costs, acquisition and integration costs, costs related to litigation, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company’s current sources of funds may be insufficient to meet the Company’s cash requirements.
Any such developments, if significant, could reduce the Company’s revenues and operating income and could adversely affect Products Corporation’s ability to comply with certain financial and/or other covenants under the 2016 Credit Agreements and/or the Senior Notes Indentures and in such event the Company could be required to take measures, including, among other things, reducing discretionary spending. (See Item 1A. "Risk Factors" in Revlon's 2016 Form 10-K for further discussion of certain risks associated with the Company's business and indebtedness.)
Derivative Fi
nancial Instruments
Foreign Currency Forward Exchange Contracts
Products Corporation enters into foreign currency forward exchange and option contracts from time-to-time to hedge certain net cash flows denominated in currencies other than the local currencies of the Company’s foreign and domestic operations. The FX Contracts are entered into primarily for the purpose of hedging anticipated inventory purchases and certain intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year. At
September 30, 2017
, the FX Contracts outstanding had a notional amount of
$162.5 million
and a net liability fair value of
$2.4 million
.
Interest Rate Swap Transaction
In November 2013, Products Corporation executed a forward-starting floating-to-fixed interest rate swap transaction (the "2013 Interest Rate Swap") that, at its inception, was based on a notional amount of $400 million in respect of indebtedness under the Old Acquisition Term Loan. The 2013 Interest Rate Swap initially had a floor of 1% that in December 2016 was amended to 0.75%. In connection with entering into the 2016 Term Loan Facility, the 2013 Interest Swap was carried over to apply to a notional amount of $400 million in respect of indebtedness under such loan for the remaining balance of the term of such swap. The Company initially designated the 2013 Interest Rate Swap as a cash flow hedge of the variability of the forecasted three-month LIBOR interest rate payments related to the $400 million notional amount under the Old Acquisition Term Loan over the three-year term of the 2013 Interest Rate Swap (and subsequently to the $400 million notional amount under the 2016 Term Loan Facility for the remaining balance of the term of such swap). Under the terms of the 2013 Interest Rate Swap, commencing in May 2015, Products Corporation receives from the counterparty a floating interest rate based on the higher of three-month U.S. Dollar LIBOR or the floor percentage in effect, while paying a fixed interest rate payment to the counterparty equal to 2.0709% (which, with respect to the 2016 Term Loan Facility, effectively fixes the interest rate on such notional amount at 5.5709% over the remaining balance of the three-year term of the 2013 Interest Rate Swap). At
September 30, 2017
and December 31, 2016, the fair value of the 2013 Interest Rate Swap was a liability of
$1.9 million
and $4.7 million, respectively.
As a result of completely refinancing the Old Acquisition Term Loan with a portion of the proceeds from Products Corporation's consummation of the 2016 Senior Credit Facilities and the 6.25% Senior Notes in connection with consummating the Elizabeth Arden Acquisition, the critical terms of the 2013 Interest Rate Swap no longer matched the terms of the underlying debt under the 2016 Term Loan Facility. At the refinancing date, or the September 7, 2016 Elizabeth Arden Acquisition Date (the "De-designation Date"), the 2013 Interest Rate Swap was determined to no longer be highly effective and the Company discontinued hedge accounting for the 2013 Interest Rate Swap. Following the de-designation of the 2013 Interest Rate Swap, changes in fair value are accounted for as a component of other non-operating expenses. Accumulated deferred losses of
$2.1 million
, or
$1.2 million
net of tax, at
September 30, 2017
that were previously recorded as a component of accumulated other comprehensive loss will be amortized into earnings over the remaining term of the 2013 Interest Rate Swap through its maturity.
Credit Risk
Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of the derivative instruments in asset positions, which totaled
$0.5 million
and
$2.3 million
as of
September 30, 2017
and
December 31, 2016
, respectively. The Company attempts to minimize exposure to credit risk by generally entering into derivative contracts with counterparties that have investment-grade credit ratings and are major financial institutions. The Company also periodically monitors any changes in the credit ratings of its counterparties. Given the current credit standing of the counterparties to the Company's derivative instruments, the Company believes the risk of loss arising from any non-performance by any of the counterparties under these derivative instruments is remote.
Disclosures about Contractual Obligations and Commercial Commitments
As of
September 30, 2017
, there were no material changes to the Company's total contractual cash obligations, as set forth in
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
the contractual obligations and commercial commitments disclosure included in Revlon's 2016 Form 10-K. The Company has recently extended its domestic vendor payment terms to better reflect industry standards. The extension became effective during the fourth quarter of 2017.
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Discussion of Critical Accounting Policies
For a discussion of the Company's critical accounting policies, see Revlon's 2016 Form 10-K.
Effect of Recently Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 1, "Description of Business and Basis of Presentation," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
REVLON, INC. AND SUBSIDIARIES
(all tabular amounts in millions, except share and per share amounts)